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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _____ to _____
Commission File No. 0-24004
HOLLINGER INTERNATIONAL INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-3518892
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
401 North Wabash Avenue, Suite 740, Chicago, Illinois 60611
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(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (312) 321-2299
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
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Class A Common Stock par value $.01 per share New York Stock Exchange
9 1/4% Senior Subordinated Notes due 2006 New York Stock Exchange
8 5/8% Senior Notes due 2005 New York Stock Exchange
9 1/4% Senior Subordinated Notes due 2007 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Class A Common Stock held by
non-affiliates as of March 20,2000, was approximately $726,102,000. As of such
date, non-affiliates held no shares of Class B Common Stock. There is no active
market for the Class B Common Stock.
The number of outstanding shares of each class of the registrant's
common stock as of March 20, 2000, was as follows: 86,749,943 shares of Class A
Common Stock and 14,990,000 shares of Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Document Location
- -------- --------
Proxy Statement for 2000 Annual Meeting of Stockholders filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934...................................................Part III
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HOLLINGER INTERNATIONAL INC.
1999 FORM 10-K
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PART I PAGE
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Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 18
Item 3. Legal Proceedings.............................................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............................................ 19
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................................................... 22
Item 6. Selected Financial Data........................................................................ 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................... 25
Item 7A. Quantitative and Qualitative Disclosure about Market Risk...................................... 39
Item 8. Financial Statements and Supplementary Data.................................................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................................................... 41
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 42
Item 11. Executive Compensation......................................................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 42
Item 13. Certain Relationships and Related Transactions................................................. 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 43
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PART I
ITEM 1. BUSINESS
OVERVIEW
Hollinger International Inc. (the "Company"), through subsidiaries and
affiliated companies, is one of the leading publishers of English-language
newspapers in the United States, the United Kingdom, Canada and Israel. In
addition, the Company has web-sites supporting each of its major newspapers and
is continuing to develop a strategic on-line new media presence. Included among
the 77 paid daily newspapers, which at December 31, 1999, the Company owned or
had an interest in, are the Chicago Sun-Times, The Daily Telegraph, the Ottawa
Citizen, The Jerusalem Post and the National Post. These 77 newspapers had a
worldwide daily combined circulation of approximately 4,015,000. In addition,
the Company owned or had an interest in 302 non-daily newspapers as well as
magazines and other publications. The Company's strategy is to achieve growth
through acquisitions and improvements in the cash flow and profitability of its
newspapers. Since the Company's formation in 1986, the existing senior
management team has acquired over 300 newspapers and related publications (net
of dispositions) in the United States, The Daily Telegraph in the United
Kingdom, The Jerusalem Post in Israel, and has made significant investments in
newspapers in Canada, including the acquisition of Southam Inc. ("Southam"),
Canada's largest newspaper publisher and the acquisition of the Canadian
Newspapers in 1997 from Hollinger Inc.
The operations of the Company consist of its Chicago Group, Community
Group, U.K. Newspaper Group, and Canadian Newspaper Group, which accounted for
18%, 4%, 26% and 52%, respectively, of the Company's total operating revenues of
$2,147.4 million for the year ended December 31, 1999.
Unless the context requires otherwise, all references herein to the
"Company" mean Hollinger International Inc., its predecessors and combined
subsidiaries, "Publishing" refers to Hollinger International Publishing Inc. and
"Hollinger Inc." refers to Hollinger Inc.
CHICAGO GROUP
The Company's Chicago Group consists of three daily and 77 non-daily
newspapers including the Chicago Sun-Times, the eighth largest circulation
metropolitan daily newspaper in the United States, the Post Tribune in Gary,
Indiana and the Daily Southtown. The Chicago Sun-Times is published in a
tabloid format and has become Chicago's best read newspaper, attracting some
1,684,000 readers every day. The suburban papers include Pioneer Newspapers
Inc. ("Pioneer Press") which currently publishes 48 weekly newspapers in
Chicago's north and northwest suburbs, and Midwest Suburban Publishing Inc.
("Midwest Suburban Publishing") which currently publishes the Daily Southtown,
one weekly newspaper, 20 biweekly newspapers and two free distribution papers
in Chicago's south and southwest suburbs. The Chicago Group also publishes
Digital Chicago magazine and in 1999 added Digital New York which appears both
on newsstands and on-line.
COMMUNITY GROUP
The Community Group consists of 46 newspapers and related
publications. At December 31, 1999, the Community Group published 13 daily
newspapers with a total paid circulation of approximately 144,000, 9 paid
non-daily newspapers with a combined paid circulation of approximately 115,000
and 24 free circulation publications with a combined circulation of
approximately 315,000. For accounting and management purposes, the Community
Group also includes the Company's wholly-owned subsidiary ("Jerusalem Post")
which publishes The Jerusalem Post, Israel's most important English-language
daily newspaper, with a paid daily circulation of approximately 14,000. The
related weekend edition of The Jerusalem Post, including the English and
French-language international weekly editions, have a combined paid circulation
of approximately 109,000.
U.K. NEWSPAPER GROUP
The Company's U.K. Newspaper Group consists of its wholly owned
subsidiary, The Telegraph Group Limited and its consolidated subsidiaries ("The
Telegraph"). The Telegraph publishes The Daily Telegraph which was launched in
1855. The Telegraph also publishes The Sunday Telegraph, The Weekly Telegraph,
the Electronic Telegraph and The Spectator magazine. The Daily Telegraph is the
largest circulation quality daily newspaper in the United Kingdom with an
average daily circulation of approximately 1,038,000, representing a 37% share
of the quality daily newspaper market. The Daily Telegraph's Saturday edition
has the highest average daily circulation (approximately 1,221,000) among
quality daily newspapers in the United Kingdom. The Sunday Telegraph is the
second largest circulation quality Sunday newspaper in the United Kingdom with
an average Sunday circulation of approximately 814,000.
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CANADIAN NEWSPAPER GROUP
At December 31, 1999, the Company's Canadian Newspaper Group primarily
consisted of Southam and the Company's 85.0% interest in Hollinger Canadian
Newspapers, Limited Partnership ("Hollinger L.P."). During the first quarter of
1999, the Company acquired the remaining shares of Southam that it did not
already own.
In April 1999, the Company formed Hollinger L.P. Hollinger L.P.
acquired 48 daily newspapers, 180 non-daily newspapers and shopping guides and
106 magazines and specialty publications located across Canada from Southam,
UniMedia Inc. and Sterling Newspapers Company in exchange for promissory notes
due April 29, 2020 of $309.5 million (Cdn. $451.2 million) and 135,945,972
units in Hollinger L.P.
On April 30, 1999, Hollinger L.P. completed a Cdn. $200.0 million
($137.2 million) private placement and investors subsequently received 20
million partnership units of Hollinger L.P. During July 1999 Hollinger L.P.
completed its initial public offering issuing 4 million units at Cdn. $10 per
unit for total proceeds of Cdn. $40.0 million ($27.0 million). All partnership
units, including the 20 million units issued through the April 30, 1999 private
placement, are now listed on the Toronto Stock Exchange. After the initial
public offering the Company continued to hold indirectly approximately 85% of
the equity of Hollinger L.P.
At December 31, 1999, Hollinger L.P. published 48 daily newspapers
with a total paid circulation of approximately 974,000, 19 paid non-daily
newspapers with a combined paid circulation of approximately 79,000 and 115
free circulation publications with a combined circulation of approximately
3,925,000.
Southam has operations in newspaper publishing, and to a lesser extent,
in business communications. Southam is Canada's largest publisher of daily
newspapers with 9 daily newspapers with a total paid daily circulation of
approximately 1,238,000. Southam's principal publications include the National
Post, The Gazette (Montreal), The Ottawa Citizen, the Calgary Herald, The
Vancouver Sun, The Province (Vancouver) and The Edmonton Journal. In addition,
the Southam Magazine and Information Group publishes Canadian business magazines
and tabloids for the automotive, trucking, construction, natural resources,
manufacturing and other industries. During 1998, Southam acquired the Financial
Post Company, which published the Financial Post. In October 1998, Southam
launched the National Post, a new national daily newspaper in Canada,
incorporating the Financial Post as the business section of the National Post.
In 1999, the National Post achieved daily readership in excess of 800,000 with
average paid circulation of 285,000. The National Post has become Canada's
leading national daily.
PRIDES EXCHANGE
In July 1998, pursuant to an exchange offer, 19,993,531 Preferred
Redeemable Increased Dividend Equity Securities ("PRIDES") were exchanged for
18,394,048 shares of Class A Common Stock, leaving 706,469 PRIDES outstanding.
At December 31, 1999 353,234 Series B Shares were outstanding, which underlie
706,469 PRIDES. In January 2000, these PRIDES were converted into 596,189 shares
of Class A Common Stock of the Company.
TOTAL RETURN EQUITY SWAP
In August and September 1998, the Company entered into an arrangement
with four banks, pursuant to which the banks purchased 12,640,305 shares of the
Company's Class A Common Stock. 2,522,600 of these shares were purchased on the
open market at an average price of $15.40 and 10,117,705 were purchased from
affiliates of the Company at an average price of $13.88. During 1999, an
additional 1,469,600 shares were purchased on the open market at an average
price of $13.96. The Company has the option, quarterly, up to including
September 30, 2000 to buy the shares from the banks at the same cost or to have
the banks resell those shares in the open market. In the latter case, any gain
or loss realized by the banks will be for the Company's account. Until the
Company purchases the shares or the banks resell them, dividends paid on the
shares belong to the Company and the Company pays interest to the banks at the
rate of LIBOR plus a spread. If the Company's stock price falls below the
average purchase price of these shares, the Company is required to deposit cash
or shares into an escrow account as additional security.
SHARE REPURCHASES
During 1999, the Company repurchased 9,978,600 shares of its Class A
Common Stock on the open market.
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OWNERSHIP BY HOLLINGER INC.
At December 31, 1999, Hollinger Inc. directly and indirectly owned
41.1% of the combined equity interest and 75.2% of the combined voting power of
the outstanding Class A Common Stock and Class B Common Stock of the Company
(without giving effect to the future issuance of Class A Common Stock in
connection with the Company's remaining PRIDES or upon conversion of the
Company's Series C Preferred Stock or remaining Series E Preferred Stock or the
Special Shares of HCPH as defined in Note 6 of the Consolidated Financial
Statements). As a result, Hollinger Inc. will continue to be able to control the
outcome of any election of directors and to direct management policy, strategic
direction and financial decisions of the Company and its subsidiaries. Hollinger
Inc. owns all of the outstanding Series C Preferred Stock which shall convert
into Class A Common Stock of the Company automatically on June 1, 2001 pursuant
to the conversion formula set forth in its Certificate of Designations and
Series E Preferred Stock of the Company, which is convertible at any time into
shares of Class A Common Stock based on a formula set forth in its Certificate
of Designations.
Hollinger Inc. is effectively controlled by The Hon. Conrad M. Black,
Chairman of the Board and Chief Executive Officer of Hollinger Inc. and of the
Company, through his direct and indirect ownership and control of Hollinger
Inc.'s securities. Mr. Black has advised the Company that Hollinger Inc. does
not presently intend to reduce its voting power in the Company's outstanding
Common Stock to less than 50%. Furthermore, Mr. Black has advised the Company
that he does not presently intend to reduce his voting control over Hollinger
Inc. such that a third party would be able to exercise effective control over
it.
SALES OF COMMUNITY GROUP OPERATIONS
In January 1998, the Company completed the sale of 80 community
newspapers for proceeds of $310.0 million. In February 1999, the Company sold 45
community newspapers for approximately $460.0 million, of which $441.0 million
was cash. On a pre-tax basis, the sales generated capital gains of approximately
$201.2 million in 1998 and approximately $249.2 million in 1999.
GENERAL
The Company was incorporated in the State of Delaware on December 28,
1990 and its wholly owned subsidiary Hollinger International Publishing Inc.
("Publishing") was incorporated in the State of Delaware on December 12, 1995.
Each of the Company and Publishing has its executive offices at 401 North Wabash
Avenue, Chicago, Illinois 60611, telephone number (312) 321-2299.
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BUSINESS STRATEGY
The Company's strategy for achieving growth in its newspaper business
is based on achieving two principal objectives: improvements in the cash flow
and profitability of its newspapers principally through cost reductions and
revenue enhancement and growth through acquisitions. The approach of both the
Company and Hollinger Inc. to improving profitability typically includes
measures to reduce costs, improve efficiency and enhance product quality,
including the visual quality of printed pages.
The Company's newspaper operating strategy in the Community Group has
been to operate newspapers in regional clusters where feasible. This enables the
Company to market advertising on a regional basis and allows for regionalized
management that results in cost savings from reduction in overhead, centralized
purchasing and, to the extent practicable, regionalized printing. The Company
intends to generate additional cost savings opportunities through operating
efficiencies and automation in the Community Group. Further, improvements in
profitability at properties acquired during the past three years will be
emphasized.
In Chicago, the focus on overall cost reduction will continue.
Significant emphasis on continuing to increase circulation at the Chicago
Sun-Times and the continued focus on deploying human resources to sales and
marketing, both locally through a combined network of all Chicago Group
newspapers, and nationally by bringing national salesmen in-house and opening
national sales offices in major business centers. In addition, efficiencies
through automation and an upgrade of printing facilities are in process.
The focus for The Daily Telegraph will continue to be to retain its
circulation dominance in its market and to increase the resulting advertising
revenue. The successful prepaid subscription program will continue, albeit at
higher subscription prices. The Company will continue to focus on maintaining
and increasing the circulation for The Sunday Telegraph. Operationally,
continued efficiencies in producing the newspapers through joint ventures in
West Ferry Printers and Trafford Park Printers are expected. Through its more
recent joint venture with Express Newspapers, Newsprint Management and Supply
Services, Ltd. ("NMSS"), The Telegraph expects to realize efficiencies in the
control of waste with a resulting decrease in newsprint costs.
At the Canadian Newspaper Group, the Company continues its current
efforts to improve the profitability of the papers through the centralization of
newsprint purchasing and certain other functions, such as accounting and
personnel. The Company coordinates, to the extent practicable, its newsprint
purchases for its United States newspapers with those of the Canadian
newspapers. To achieve greater product quality and cost reductions, the Company,
where justified by economic and operational criteria, may regionalize production
operations at its Canadian community newspapers and may explore the feasibility
of such regionalization with Southam's newspaper operations in Canada. The
Company also intends to enhance advertising and circulation revenues by focusing
on the natural circulation and readership advantages of the particular
newspapers.
Southam intends to continue to improve profitability of its newspapers,
magazines and other publications through the implementation of the previously
announced labor cost reduction program, the decentralization of certain
administrative and corporate functions, and enhancements to editorial and
product quality. In October 1998, Southam launched the National Post, which
suffered anticipated start up operating losses; however, increases in
advertising and circulation revenue in 2000 are expected to reduce the level of
operating losses and increase long-term profitability of the National Post. New
printing equipment at Pacific Press, which became operational in 1997, has
improved product print quality and is expected to continue to reduce labor and
other operating costs.
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The Company remains vigilant for the opportunity to purchase newspapers
that are underperforming in terms of cash flow but have a long history of
publishing within a community, possess strong readership and advertiser loyalty,
have the potential for increased gross operating profit through cost reductions,
revenue enhancements and synergies with the Company's existing operations; and
are available at attractive prices. The Company expects that its future
acquisitions in the United States and Canada will be principally of community
newspapers; however, the Company may consider the acquisition of selected larger
circulation publications that meet the Company's acquisition criteria.
The Company and Hollinger Inc. have historically agreed that the
Company will be Hollinger Inc.'s principal vehicle for engaging in and effecting
acquisitions in the newspaper business and in related media businesses in the
United States, Israel and, through The Telegraph, the United Kingdom and the
rest of the European Community. Hollinger Inc. reserved the ability to pursue
all media (including newspaper) acquisition opportunities outside these areas
and all media acquisition opportunities unrelated to the newspaper business
throughout the world.
The Company has developed a comprehensive Internet strategy. Internet
activities fall into three main areas: (1) web sites related to the various
print publications, which are 100% owned and reported within the traditional
segments; (2) joint ventures between our print publications and
non-publishing-related outsiders, where each party adds value and where the
Company has a certain amount of control; and (3) minority investments in
unrelated third parties.
The print-related and joint venture strategies represent an
opportunity to fortify the newspapers in their local markets by providing them
with the necessary tools to offer a complete suite of on-line and print options
for their clients. The Company has stayed competitive by building significant
web sites at all our major divisions. The strategy is specifically designed to
achieve rapid acceleration of the Web activities. The Company is building a
solid foundation for expansion and growth, an even more valuable asset base,
and technology and services which further strengthen the print and online
publications. All the metropolitan newspapers will be commerce-enabled by the
middle of the current year.
The Company's strategy regarding minority investments is primarily to
identify promising Internet opportunities and make investments that are
eventually expected to be monetized. The cost of early entry in the Internet
business is not high and discriminating investors, which Hollinger has so far
proved to be, can enjoy an impressive return on investments. A significant part
of the consideration for these investments can be in advertising.
RISKS
Certain statements contained in this report under various sections,
including but not limited to "Business Strategy" and "Management's Discussion
and Analysis", are forward-looking statements that involve risks and
uncertainties. Such statements are subject to the following important factors,
among others, which in some cases have affected, and in the future could affect,
the Company's actual results and could cause the Company's actual consolidated
results for the first quarter of 2000, and beyond, to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the
Company:
o International Holding Company Structure - The Company is an
international holding company and its assets consist solely of
investments in its subsidiaries and affiliated companies. As a result,
the Company's ability to meet its future financial obligations is
dependent upon the availability of cash flows from its United States
and foreign subsidiaries through dividends, intercompany advances,
management fees and other payments. Similarly, the Company's ability to
pay dividends on its common stock and its preferred stock may be
limited as a result of its dependence upon the distribution of earnings
of its subsidiaries and affiliated companies. The Company's
subsidiaries and affiliated companies are under no obligation to pay
dividends and, in the case of Publishing, and its principal United
States and foreign subsidiaries, are subject to statutory restrictions
and restrictions in debt agreements that limit their ability to pay
dividends. Substantially all of the shares of the subsidiaries of the
Company have been pledged to lenders of the Company. The Company's
right to participate in the distribution of assets of any subsidiary or
affiliated company upon its liquidation or reorganization will be
subject to the prior claims of the creditors of such subsidiary or
affiliated company, including trade creditors, except to the extent
that the Company may itself be a creditor with recognized claims
against such subsidiary or affiliated company.
o Growth Strategy - The Company's strategy is to achieve growth through
acquisitions and improvements in the cash flow and profitability of its
newspapers, principally through cost reductions. The Company's growth
strategy presents risks inherent in assessing the value, strengths and
weaknesses of acquisition opportunities, in evaluating the costs of new
growth opportunities at existing operations and in managing the
numerous publications it has acquired and improving their operating
efficiency. While the Company believes that there are significant
numbers of potential acquisition candidates, the Company is unable to
predict the number or timing of future acquisition opportunities or
whether any such opportunities will meet the Company's acquisition
criteria or, if such acquisitions occur, whether the Company will be
able to achieve improved operating efficiencies or enhanced
profitability. In addition, the Company's acquisition strategy is
largely dependent on the Company's ability to continue to obtain
financing on acceptable terms.
o Restrictions in Debt Agreements and Other Restrictive Arrangements -
The Company and its subsidiaries have substantial leverage and
substantial debt service obligations as well as obligations under the
preferred stock of the Company. The instruments governing the terms of
the principal indebtedness and redeemable preferred stock of the
Company, Publishing and its principal United States and foreign
subsidiaries contain various covenants, events of default and other
provisions that could limit the financial flexibility of the Company,
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including the payment of dividends with respect to outstanding common
stock and preferred stock and the implementation of its growth
strategy.
o Cyclicality of Revenues - Advertising and, to a lesser extent,
circulation revenues of the Company, as well as those of the newspaper
industry in general, are cyclical and dependent upon general economic
conditions. Historically, increases in advertising revenues have
corresponded with economic recoveries while decreases, as well as
changes in the mix of advertising, have corresponded with general
economic downturns and regional and local economic recessions. The
Company believes, however, that the geographic diversity of its global
operations may mitigate, to some degree, the effects of an economic
downturn in any particular market served by the Company.
o Newsprint Costs - Newsprint represents the single largest raw material
expense of the Company's newspapers throughout the world and, together
with employee costs, is one of the most significant operating costs.
Newsprint costs vary widely from time to time. For example, newsprint
cost increased approximately 40% per metric ton in 1995 on an
industry-wide basis, and the average cost per metric ton of newsprint
was substantially higher in the first half of 1996 than in the first
half of 1995. However, newsprint costs decreased significantly in the
second half of 1996, continued to decline through the second quarter of
1997 and increased slightly in the second half of 1997. Newsprint
prices increased slightly through 1998 but decreased in 1999. The
Company expects that newsprint prices in 2000 will likely be marginally
higher than 1999. Although the Company has implemented measures in an
attempt to offset a rise in newsprint prices, such as reducing page
width and managing its return policy, price increases have had an
adverse effect on the Company's results of operations.
o Foreign Operations and Currency Exchange Rates - Operations outside of
the United States accounted for approximately 77.3% of the Company's
operating revenues and approximately 82.6% of the Company's operating
income for the year ended December 31, 1999. Generally, the Company
does not hedge against foreign currency exchange rate risks except
through borrowings in those currencies. As a result, the Company may
experience economic loss and a negative impact on earnings with respect
to its investments and on dividends from its foreign subsidiaries,
solely as a result of currency exchange rate fluctuations.
o Newspaper Industry Competition - Revenues in the newspaper industry are
dependent primarily upon advertising revenues and paid circulation.
Competition for advertising and circulation revenue comes from local
and regional newspapers, radio, broadcast and cable television, direct
mail, and other communications and advertising media that operate in
the Company's markets. The extent and nature of such competition is, in
large part, determined by the location and demographics of the markets
and the number of media alternatives in those markets. Some of the
Company's competitors are larger and have greater financial resources
than the Company. For example, in the Chicago metropolitan area, the
Chicago Sun-Times competes with a large established metropolitan daily
and Sunday newspaper that is the fifth largest metropolitan daily and
Sunday newspaper in the United States. In the United Kingdom, The Daily
Telegraph competes with other national newspapers, principally The
Times, which over the past several years has from time to time
substantially reduced its cover price in an effort to increase its
circulation. The Telegraph has met this competition and has from time
to time engaged in its own price reduction or promotional initiatives.
Electronic media is becoming a larger factor in newspaper industry
competition. Management continues to hold the view that newspapers will
continue to be an important business segment. Among educated and
affluent people, indications are that strong newspaper readership will
continue. In fact, it is possible that readership will increase as the
population ages. Alternate forms of information delivery such as the
Internet could impact newspapers, but recognition of the Internet's
potential combined with a strong newspaper franchise could be a
platform for Internet operations. Newspaper readers can be offered a
range of Internet services as varied as the content. Virtually all
newspapers are now published on the Internet as well as in the
traditional newsprint format. The concern most frequently expressed
regarding the commercial viability of newspapers is that they will lose
their classified advertising revenue. We have put our classified
advertising on the Internet and linked this with other newspapers to
make regional or national networks. These competitive activities can
and have from time to time had an adverse effect on revenues and
operating costs.
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CHICAGO GROUP
SOURCES OF REVENUE. The following table sets forth the sources of
revenue and the percentage such sources represent of total revenues for the
Chicago Group during the past three years.
YEAR ENDED DECEMBER 31,
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1999 1998 1997
--------------------- --------------------- ---------------------
(DOLLARS IN THOUSANDS)
Advertising ...... $294,124 75 % $281,615 74 % $243,301 71 %
Circulation ...... 80,551 21 82,534 22 79,574 23
Job printing
and other ..... 15,798 4 14,960 4 18,493 6
-------- -------- -------- -------- -------- --------
Total ............ $390,473 100 % $379,109 100 % $341,368 100 %
======== ======== ======== ======== ======== ========
ADVERTISING Substantially all advertising revenues are derived from
local and national retailers and classified advertisers. Advertising rates and
rate structures vary among the publications and are based, among other things,
on circulation, penetration and type of advertising (whether classified,
national or retail). In 1999, retail advertising accounted for the largest share
of advertising revenues (46%), followed by classified (42%) and national (12%).
The Chicago Sun-Times offers a variety of advertising alternatives,
including full-run advertisements, geographically zoned issues, special interest
pull-out sections and advertising supplements in addition to regular sections of
the newspaper targeted to different readers, such as arts, food, real estate, TV
listings, weekend, travel and special sections. The Chicago area suburban
newspapers also offer weekly both separate and special sections. Management has
also developed the Sun-Times Newspaper Network, an advertising vehicle that can
reach the combined readership base of the Chicago Sun-Times and the Chicago area
suburban newspapers, including the Daily Southtown. During 1999, the Company
joined with two other Chicago-area publishers, Copley Chicago Newspapers and
Paddock Publications, to create a regional classified-advertising web site.
The new site, www.classifiedschicago.com, pools classified advertisements from
nearly 100 daily and weekly newspapers including three of the Chicago
metropolitan area's biggest dailies, to create a valuable new venue for
advertisers, readers and on-line users.
CIRCULATION Circulation revenues are derived from single copy newspaper
sales made through retailers and vending racks and home delivery newspaper sales
to subscribers. Approximately 65% of the copies of the Chicago Sun-Times sold in
1999 were single copy sales. Approximately 70% of 1999 circulation revenues of
the Chicago area suburban newspapers were derived from subscription sales.
The average paid daily and Sunday circulation of the Chicago Sun-Times
is approximately 472,000 and 405,000, respectively, the daily and Sunday paid
circulation of the Daily Southtown is approximately 52,000 and 60,000,
respectively, the daily and Sunday paid circulation of the Gary Post-Tribune is
approximately 63,000 and 68,000, respectively, and the aggregate non-daily paid
and free circulation of the Chicago area suburban newspapers is approximately
254,000 and 492,000, respectively.
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COMPETITION. Each of the Company's Chicago area newspapers competes in
varying degrees with radio, television, direct marketing and other
communications and advertising media as well as with other newspapers having
local, regional or national circulation. The Chicago metropolitan region is
comprised of Cook County and six surrounding counties and is served by six daily
newspapers of which the Company owns two.
The Chicago Sun-Times competes in the Chicago region with the Chicago
Tribune, a large established metropolitan daily and Sunday newspaper, which is
the fifth largest newspaper in the United States. In addition, the Chicago
Sun-Times and other Chicago Group newspapers face competition from other
newspapers published in adjacent or nearby locations and circulated in the
Chicago metropolitan area market.
EMPLOYEES AND LABOR RELATIONS. As of March 20, 2000, the Chicago Group
employed approximately 3,100 employees (including approximately 700 part-time
employees). Approximately 1,400 employees are represented by 15 collective
bargaining units. Employee costs (including salaries, wages, fringe benefits,
employment-related taxes and other direct employee costs) equaled approximately
38% of the Chicago Group's revenues in the year ended December 31, 1999. There
have been no strikes or general work stoppages at any of the Chicago Group's
newspapers in the past five years. The Chicago Group believes that its
relationships with its employees are generally good.
RAW MATERIALS. The basic raw material for newspapers is newsprint.
Newsprint costs equaled approximately 16% of the Chicago Group's revenues in the
year ended December 31, 1999. Newsprint prices for the Chicago Group decreased
about 10% during 1999. The Chicago Group is not dependent upon any single
newsprint supplier. To ensure an adequate supply of newsprint, the Chicago Group
has newsprint supply contracts with certain minimum purchase requirements. The
Chicago Group, like other newspaper publishers, has not entered into any
long-term fixed price newsprint supply contracts in the current environment of
newsprint costs. The Chicago Group believes that its sources of supply for
newsprint are adequate for its anticipated needs.
COMMUNITY GROUP
The Community Group consists of smaller newspaper publications in the
United States and Israel. The Community Group's United States daily newspapers
are typically the only paid daily newspapers of general circulation in their
respective communities. Circulation for community newspapers range from 3,400 to
32,200 for paid dailies and from 2,300 to 31,800 for paid non-dailies.
Generally, the Company's community newspapers combine news, sports and features
with a special emphasis on local information and provide one of the primary
sources of such community information for the towns in which they are
distributed. In addition to reaching the local population through paid daily and
non-daily community newspapers, the Company also publishes free circulation
"total market coverage" publications, including shoppers, with limited or no
news or editorial content. As a group, these publications provide the Company
with a stable and established circulation within the communities they serve,
which it believes provides an effective medium for advertisers to reach a
significant portion of the households in these communities.
-8-
11
SOURCES OF REVENUE. The following table sets forth the sources of
revenue and the percentage that such sources represent of total revenues for the
Community Group, including Jerusalem Post, during the past three years.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
Advertising ........ $ 57,535 60% $135,216 64% $190,215 65%
Circulation ........ 26,618 27 49,449 24 69,499 24
Job printing
and other ....... 12,521 13 25,442 12 32,551 11
-------- -------- -------- -------- -------- --------
Total .............. $ 96,674 100% $210,107 100% $292,265 100%
======== ======== ======== ======== ======== ========
ADVERTISING. Substantially all of the United States community newspaper
advertising revenues in 1999 were derived from local retailers and classified
advertisers, which management believes are less subject to fluctuation than
national advertising. Advertising rates and rate structures vary among the
publications and are based, among other things, on circulation penetration and
type of advertising (whether classified, display, or retail). In 1999, United
States local and regional advertising accounted for the largest share of
advertising revenues (49%), followed by classified (27%), preprinted inserts
(18%) and national (6%).
Management intends to continue to develop new advertising revenue
sources such as regional and national display advertising, co-op advertising,
national classified advertising and other targeted advertising. The Company
believes its existing sales, editorial and distribution resources provide it
with significant cost advantages in developing new shoppers, other "total market
coverage" and targeted publications in these markets.
CIRCULATION. Circulation revenues are derived from home delivery sales
of newspapers to subscribers and single copy sales made through retailers and
vending racks. Approximately 74% of the 1999 United States community newspaper
circulation revenue was derived from subscription sales. When possible
subscription and single copy sales rates are increased in an effort to increase
circulation revenues. Single copy cover prices currently range from 35(cent)to
75(cent).
JOB PRINTING. Job printing revenues are derived from utilizing
available press capacity for printing customers' orders for newspapers, fliers,
retail store advertisements and real estate listings. The Company currently has
a substantial number of printing customers and believes that its growth
potential for job printing exists mainly in low volume (less than 100,000
copies) offset printing.
COMPETITION. Each of the Company's community newspapers and total
market coverage publications competes in varying degrees with radio, television,
direct marketing and other communications and advertising media as well as with
other newspapers having local, regional or national circulation. The Company
also competes with other commercial printers for job printing orders.
The Company's United States community publications are located in small
towns which, for the most part, are not suburbs of larger cities but are either
county seats or are located on significant transportation corridors. The
Company's community dailies are typically the only paid daily newspapers of
general circulation published in their respective communities. The Company
believes that distribution of its total market coverage publications with nearly
100% penetration levels in conjunction with community daily or non-daily
newspapers strengthens its competitive position in the relevant market areas.
Some of the Company's dailies face competition from dailies published by others
in adjacent or nearby locations and circulated in the markets where the Company
publishes a newspaper.
The Company's total market coverage publications, including shoppers,
compete primarily with direct mail advertising, shared mail packages and other
private advertising delivery services. The Company believes that because of its
significant presence in the small towns served by its community publications,
which are predominantly in rural areas, not close to metropolitan areas, and its
established distribution network, it has been able to compete effectively.
-9-
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EMPLOYEES AND LABOR RELATIONS. As of March 20, 2000, the Community
Group employed approximately 1,100 employees (including approximately 470
part-time employees) at its community publications in the United States.
Approximately 5% of these employees are represented by unions. Total Community
Group employee costs (including salaries, wages, fringe benefits,
employment-related taxes and other direct employee costs) equaled approximately
35% of the Community Group's revenues in fiscal year 1999. There have been no
strikes or general work stoppages at any of the Company's community newspapers
in the past five years. The Company believes that its relationships with its
employees are generally good.
RAW MATERIALS. The basic raw material for newspapers is newsprint.
Newsprint costs equaled approximately 10% of revenues for the Community Group in
1999. The Community Group is not dependent upon any single newsprint supplier
and does not have long-term fixed price contracts with newsprint suppliers for
its community publications. It currently obtains newsprint from a number of
suppliers, foreign and domestic. The Community Group believes that its newsprint
sources of supply are adequate for its anticipated needs.
JERUSALEM POST.
Over 42% of Jerusalem Post's revenues of $20.3 million in 1999 were
derived from circulation, with 31% from job printing and other and 27% from
advertising. Jerusalem Post derives a greater percentage of its revenues from
job printing than the Company's United States newspapers. Jerusalem Post has
entered into a long-term contract to print and bind copies of the "Golden
Pages", Israel's equivalent of a "Yellow Pages" telephone directory. Newsprint
costs relating to publication of The Jerusalem Post equaled approximately 9%
of Jerusalem Post's revenues in 1999. Newsprint used in producing the "Golden
Pages" is provided by the owners of that publication.
Newspapers in Israel are required by law to obtain a license from the
country's interior minister, who is authorized to restrain publication of
certain information if, among other things, it may endanger public safety. To
date, Jerusalem Post has not experienced any difficulties in maintaining its
license to publish or been subject to any efforts to restrain publication. In
addition, all written media publications in Israel are reviewed by Israel's
military censor prior to publication in order to prevent the publication of
information that could threaten national security. Such censorship is considered
part of the ordinary course of business in the Israeli media and has not
adversely affected Jerusalem Post's business in any significant way.
-10-
13
ENVIRONMENTAL
The Company, in common with other newspaper companies engaged in
similar operations, is subject to a wide range of federal, state and local
environmental laws and regulations pertaining to air and water quality, storage
tanks, and the management and disposal of wastes at its major printing
facilities. These requirements are becoming increasingly more stringent. The
Company believes that compliance with these laws and regulations will not have a
material adverse effect on the Company.
U.K. NEWSPAPER GROUP
THE TELEGRAPH
THE UNITED KINGDOM NATIONAL NEWSPAPER INDUSTRY. The newspaper market in
the United Kingdom is segmented and, within each segment, highly competitive.
The market segment in which The Daily Telegraph competes is generally known as
the quality daily newspaper segment. This segment consists of all the
broadsheets and none of the tabloid daily newspapers. The Daily Telegraph and
its competitors in this market segment appeal to the middle and upper end of the
demographic scale.
Newspapers in the United Kingdom differ from their counterparts in
North America in several respects. First, they have substantially fewer pages.
The Daily Telegraph is printed in one section on Tuesdays, Wednesdays and
Fridays, two sections on Mondays, three sections on Thursdays, and nine
sections plus a magazine and television guide on Saturdays. The Sunday Telegraph
is published in six sections with two magazines. Second, pre-printed advertising
inserts, which have been a major source of revenue growth in North America, are
less common in the United Kingdom but there has been an increase in advertiser
interest in such supplements. Third, the advertising to news ratio in British
newspapers is far lower. Fourth, British national newspapers more closely
resemble North American magazines in that they have broad distribution and
readership across the country and derive a much larger portion of their
advertising revenue from national advertisers - unlike North American newspapers
which, because of their relatively small geographical distribution, derive a
substantial portion of their advertising from local advertisers. Finally,
newspapers in the United Kingdom generally have charged higher cover prices,
which in turn leads to higher circulation revenues than North American
newspapers with similar circulation bases. However, since September 1993, when
The Times, the nearest direct competitor to The Daily Telegraph, first
substantially reduced its cover price on its weekday newspaper, the national
newspaper market in the United Kingdom has experienced intense cover price
competition.
-11-
14
SOURCES OF REVENUE. The following table sets forth the sources of
revenue and their percentage of total revenues for the Telegraph during the past
three years.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
(IN THOUSANDS OF BRITISH POUNDS STERLING)
Advertising ...... L. 225,326 66 % L. 221,167 66 % L. 204,498 68 %
Circulation ...... 98,071 29 98,488 30 82,917 28
Other ............ 16,575 5 12,403 4 12,232 4
---------- ---------- ---------- ---------- ---------- ----------
Total ............ L. 339,972 100 % L. 332,058 100 % L. 299,647 100 %
========== ========== ========== ========== ========== ==========
- ---------------------------
(1) Financial data is in accordance with U.K. GAAP.
ADVERTISING. Advertising is the largest source of revenue at The
Telegraph. The Telegraph's display advertising strengths are in the automobile
and travel sections. The level of classified advertisements, especially
recruitment advertisements, fluctuates with the economy. The Telegraph's
strategy with respect to classified advertising is to improve volume and yield
in four sectors: recruitment, property, travel and automobiles. Classified
advertising revenue, which represents 28% of total advertising revenue,
decreased in 1999 primarily due to a slowdown in recruitment advertising.
Recruitment advertising is the largest classified advertising category,
representing about 52% of all classified advertising in terms of revenue.
-12-
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CIRCULATION. The target audience of The Telegraph's newspapers is
generally conservative, middle and upper income readers, with an increased
emphasis on gaining new younger readers. The editorial strengths of The
Telegraph's newspapers provide national and international news, financial news
and features and comprehensive sports coverage.
In May 1996 the Telegraph introduced the first United Kingdom national
advance purchase subscription program. In the past, newspaper subscribers in the
U.K. dealt directly with independent newsagents for the purchase of newspapers.
A significant portion of the newspaper readers did not take the paper every day
and this was especially true for Sunday. This program has proven successful in
driving circulation increases although there has been some inevitable
cannibalization of circulation revenues. By the end of 1996, the plan had added
about 100,000 new weekday and 200,000 new Sunday average sales and the average
prepaid subscription was for a period of about 40 weeks. In order to gain broad
acceptance of this revolutionary plan, the subscriptions were offered at a
significant discount. The amount of that discount was reduced throughout 1997
and continued to be reduced thereafter. The program currently has approximately
300,000 subscribers. By obtaining long term subscribers, The Telegraph expects
to reduce its traditional promotional spending.
OTHER PUBLICATIONS AND BUSINESS ENTERPRISES. The Telegraph is involved
in several other publications and business enterprises, including The Spectator,
The Weekly Telegraph, and the Electronic Telegraph. The Electronic Telegraph has
more than a million registered users with some 80,000 logging on every day. The
Telegraph utilizes its brand in developing third party revenue opportunities
including Reader Offers and Books Direct.
During 1999, the Company, in cooperation with The Boots Company
plc--UK's leading beauty and health retailer, launched a new web site focusing
on the women's on-line market, www.handbag.com. The site deals with, among other
things, health, beauty and the arts.
COMPETITION. In common with other national newspapers in the United
Kingdom, The Telegraph's newspapers compete for advertising revenue with other
forms of media, particularly television, magazine, direct mail, posters and
radio. In addition, total gross advertising expenditures, including financial,
display and recruitment classified advertising, are affected by economic
conditions in the United Kingdom.
EMPLOYEES AND LABOR RELATIONS. At March 20, 2000, The Telegraph and its
subsidiaries employed approximately 1,100 persons and the joint venture printing
companies employed an additional 1,100 persons. Collective agreements between
The Telegraph and the trade unions representing certain portions of The
Telegraph's workforce expired on June 30, 1990 and have not been renewed or
replaced. The absence of such collective agreements has had no adverse effect on
The Telegraph's operations and, in management's view, is unlikely to do so in
the foreseeable future.
-13-
16
The Telegraph's joint venture printing companies, West Ferry Printers
and Trafford Park Printers, each have "in-house" collective agreements with the
unions representing their employees and certain provisions of these collective
agreements are incorporated into the employees' individual employment contracts.
In contrast to the union agreements that prevailed on Fleet Street when
Hollinger Inc. acquired control of The Telegraph, these collective agreements
provide that there shall be flexibility in the duties carried out by union
members and that staffing levels and the deployment of staff are the sole
responsibility of management. Binding arbitration and joint labor-management
standing committees are key features of each of the collective agreements. These
collective agreements may be terminated by either party by six months' prior
written notice.
There have been no strikes or general work stoppages involving
employees of the Telegraph or the joint venture printing companies in the past
five years. Management of the Telegraph believes that its relationships with its
employees and the relationships of the joint venture printing companies with
their employees are good.
RAW MATERIALS. Newsprint represents the single largest raw material
expense of the Telegraph's newspapers and, next to employee costs, is the most
significant operating cost. Approximately 170,000 metric tons are consumed
annually and in 1999 the total cost was approximately 18% of its newspaper
revenues.
The Telegraph has a new joint venture with Express Newspapers, a
subsidiary of United News & Media plc to manage the newsprint resource. The new
joint venture company, Newsprint Management & Supply Services Ltd. ("NMSS"), has
as its main purpose the control of specifications, sourcing and the monitoring
of usage through the printing plants operated by the joint venture partners, and
other locations where the partners' publications are printed on a contract
basis. NMSS commenced operations on January 1, 1998. Through close liaison with
printing management, the benefits of common newsprint specifications and better
control over inventory levels, reductions in operating waste are becoming
evident. NMSS is responsible for about 360,000 tonnes per annum of newsprint
consumption and 74,000 tonnes of magazine paper consumption.
The newsprint supply agreements entered into by NMSS provide
for tonnages from individual suppliers of between 30,000 and 65,000 tonnes.
Prices are fixed throughout 2000 at levels some 2% below the average price paid
during the last year. Inventory held at each printing location is sufficient for
three to four days production and in addition, suppliers' stock held in the
United Kingdom on behalf of NMSS represents a further four to five weeks
consumption by the joint ventures.
PRINTING. All copies of The Daily Telegraph and The Sunday Telegraph
are printed by The Telegraph's two 50% owned joint venture printing companies,
West Ferry Printers and Trafford Park Printers. The Telegraph has a very close
involvement in the management of the joint venture companies and regards them as
being important to The Telegraph's day-to-day operations. The magazine sections
of the Saturday edition of The Daily Telegraph and of The Sunday Telegraph are
printed under contract by external magazine printers.
The managements of both joint venture printing companies continually
seek to improve production performance. Major capital expenditures require the
approval of the boards of directors of the joint venture partners.
There is high utilization of the plants at West Ferry and Trafford Park
Printers, with little spare capacity. At Trafford Park Printers, revenue earned
from contract printing for third parties has a marginal effect on The
Telegraph's printing costs. West Ferry Printers also undertakes some contract
printing for third parties, which results in increased profitability.
West Ferry Printers has eighteen presses, six of which are configured
for The Telegraph's newspapers, eight are used for the newspapers published by
The Telegraph's joint venture partner, Express Newspapers, and the remaining
four for contract printing customers. Trafford Park Printers has four presses,
two of which are used primarily for The Telegraph's newspapers.
-14-
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DISTRIBUTION. Since 1988, The Telegraph's newspapers have been
distributed to wholesalers by truck under a contract with a subsidiary of TNT
Express (UK) Limited. During 1996, the Express titles and The Daily Telegraph
and The Sunday Telegraph, which are all printed at West Ferry Printers in
London, began distribution to wholesalers on the same trucks. At Trafford Park
Printers in Manchester, where The Daily Telegraph, The Sunday Telegraph and The
Guardian are printed, a joint distribution service was arranged. Previously, the
Express titles and the Guardian were distributed separately from the Telegraph
titles. The Telegraph's arrangements with wholesalers contain performance
provisions to ensure minimum standards of copy availability while controlling
the number of unsold copies.
Wholesalers distribute newspapers to retail news outlets. The number of
retail news outlets throughout the United Kingdom has increased as a result of a
1994 ruling by the British Department of Trade and Industry that prohibits
wholesalers from limiting the number of outlets in a particular area. More
outlets do not necessarily mean more sales and The Telegraph's circulation
department has continued to develop its control of wastage while taking steps to
ensure that copies remain in those outlets with high single copy sales. In
addition to single copy sales, many retail news outlets offer home delivery
services. In 1999 home deliveries accounted for 41% of sales of The Daily
Telegraph and 42% of sales of The Sunday Telegraph.
Historically, wholesalers and retailers have been paid commissions
based on a percentage of the cover price. Prior to June 1994 when competitive
pressures caused The Telegraph to reduce its cover price, wholesaler and
retailer commissions amounted to approximately 34% of the then cover price.
Notwithstanding the reduction of the cover price, the commissions paid were not
reduced. In line with other national newspapers, The Telegraph has recently
moved away from a commission paid on a percentage of cover price to a fixed
price in pence per copy and has reduced the amount paid to wholesalers and
retailers in terms of pence per copy.
REGULATORY AND ENVIRONMENTAL MATTERS. United Kingdom companies are
subject to various competition laws, including the Restrictive Trade Practices
Act 1956-1976 (the "RTPA"), which requires the registration of certain
restrictive or information-sharing agreements with the Office of Fair Trading
and, under certain circumstances, prohibits such agreements. In common with
other major newspaper publishers, The Telegraph has given undertakings in
proceedings under the RTPA to the Restrictive Practices Court in respect of,
among other things, both daily and Sunday papers. These undertakings include a
general undertaking not to enter into any kind of agreement registrable under
the RTPA of which particulars are not furnished to the Office of Fair Trading
within the prescribed period. The Telegraph has also given a number of specific
undertakings (concerning pricing, wholesaler discounts and other conditions upon
which newspapers may be supplied) which prohibit the entering of agreements
containing the restrictions specified in the undertakings or any agreements to
the like effect. A breach of any of the undertakings may result in The Telegraph
(and potentially any individuals involved) being held in contempt of court. The
Telegraph has instituted procedures designed to ensure that all personnel in
relevant managerial positions are required to acknowledge quarterly that they
have been reminded of the requirements of the RTPA, the meaning and scope of the
undertakings given, the necessity of obtaining legal advice in case of doubt and
the consequences and seriousness of any breach. A code of conduct, which
contains this information, has been circulated among relevant personnel.
The Telegraph and its joint venture printing companies, West Ferry
Printers and Trafford Park Printers, in common with other newspaper publishers
and printers, are subject to a wide range of environmental laws and regulations
promulgated by United Kingdom and European authorities. These laws are becoming
increasingly more stringent. Management of The Telegraph believes that
compliance with these laws and regulations will not have a material adverse
effect on The Telegraph.
-15-
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CANADIAN NEWSPAPER GROUP
SOURCES OF REVENUE. The following table sets forth the revenue mix
of the Canadian Newspaper Group for the three years ended December 31, 1999:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1999 1998 1997
------------------------- --------------------------------- -------------------------
(IN THOUSANDS OF CANADIAN DOLLARS)
Newspapers:
Advertising Cdn.$ 1,207,673 73% Cdn.$ 1,118,248 71% Cdn.$ 1,051,292 70%
Circulation 313,817 19 315,746 20 314,998 21
Job printing and
other 69,380 4 80,193 5 61,393 4
Business
Communications 56,350 4 64,368 4 75,852 5
--------------- ------- --------------- -------- --------------- -------
Total Cdn.$ 1,647,220 100% Cdn.$ 1,578,555 100% Cdn.$ 1,503,555 100%
=============== ======= =============== ======== =============== =======
ADVERTISING. Advertisements are carried either within the body of
the newspapers, and referred to as run-of-press (ROP) advertising, or as inserts
and other. ROP, which represented 87% of total advertising revenues in 1999, is
categorized as either retail, classified or national. The three categories
represented 40%, 28% and 32%, respectively, of ROP advertising revenues in 1999.
A full year of operations of the National Post contributed to the increase in
advertising revenue.
CIRCULATION. Circulation revenue is derived from subscription sales and
single copy sales. Approximately 85% of circulation revenue was from
subscription sales.
COMPETITION. The majority of revenues are from advertising. Advertising
linage in the company's newspapers is affected by a variety of factors including
competition from print, electronic and other media as well as general economic
performance and the level of consumer confidence. Specific advertising segments
such as real estate, automotive and help wanted will be significantly affected
by local factors.
EMPLOYEES AND LABOR RELATIONS. As of March 20, 2000, the Canadian
Newspaper Group had approximately 10,600 employees (including approximately
1,200 part-time employees). The Canadian Newspaper Group has approximately 100
union contracts in its newspaper operations. The percentage of unionized
employees varies widely from paper to paper. For Southam's nine largest
newspapers, which represent 70% of the total number of employees in the daily
newspaper operations, approximately 63% of the workforce is unionized.
Approximately 30 contracts were
-16-
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renegotiated in 1999. The Calgary Herald has continued publishing despite a
strike by journalists starting in November 1999 over questions of seniority and
editorial control. The financial impact on the Herald has been, and is expected
to continue to be, negligible. The Company does not expect that the strike will
impact other Canadian newspaper operations. With the large number of contracts
being renegotiated every year, labor disruptions are always possible.
RAW MATERIALS. The basic raw materials for newspapers is newsprint.
Newsprint consumption in 1999 was 287,000 tonnes and newsprint costs represented
approximately 13% of total revenues. The average price per tonne decreased
approximately 10% compared to prior years. The newspapers within the Canadian
Newspaper Group have access to adequate supplies to meet anticipated production
needs. They are not dependent upon any single newsprint supplier. The Canadian
Newspaper Group, like other newspaper publishers, has not entered into any
long-term fixed price newsprint supply contracts in the current environment of
newsprint costs.
REGULATORY MATTERS. The publication, distribution and sale of
newspapers and magazines in Canada is regarded as a "cultural business" under
the Investment Canada Act and consequently, any acquisition of control of
Southam by a non-Canadian investor would be subject to the prior review and
approval by the Minister of Industry of Canada. Because Hollinger International,
Inc. is controlled by Hollinger Inc. that in turn is controlled by Canadians,
the current ownership is acceptable.
In August 1988, Hollinger Inc. and UniMedia Inc., a wholly owned
subsidiary of Hollinger Canadian Newspaper Holdings Inc. ("HCPH") entered into
an agreement with Sodec (Societe de development des enterprises culturelles),
an agency of the Quebec government, pursuant to which Sodec was granted an
assignable right of first refusal in the event of the proposed acquisition by a
person not resident in Quebec of the assets of LeSoleil and Le Quotidien or of
the proposed direct or indirect acquisition by a person not resident in Quebec
of control of UniMedia Inc.
RELATIONSHIP WITH THE COMPANY. The Company and Hollinger Inc. now
directly own a combined 100% interest in Southam through HCPH, a New Brunswick
holding company. The Company's interest in Southam, is held by HCPH in which
Publishing and Hollinger Inc. own, directly or indirectly, the following
interests; (i) Publishing and its subsidiaries own 100% of the non-voting equity
shares and non-voting preference shares and (ii) each of Publishing and
Hollinger Inc. (through its wholly-owned subsidiary) own 50% of the voting
preference shares which have only nominal equity value. Hollinger Inc. has
pledged its interest in HCPH as collateral for bank financing arrangements of
the Company and its subsidiaries.
-17-
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ITEM 2. PROPERTIES
The Company's management believes that its properties and equipment are
in generally good condition, well-maintained, and adequate for current
operations.
CHICAGO GROUP
All editorial, pre-press, press, marketing, sales, and administrative
activities for the Chicago Sun-Times are conducted in a 535,000 square foot,
seven-story building owned by the Chicago Sun-Times. The Company is in the
process of constructing a new press facility, at an expected total cost of
approximately $115 million. It is anticipated that the new press facility will
be operational in the latter part of 2000.
Pioneer Press utilizes and owns a building in north suburban Chicago
for editorial, pre-press, sales and administrative activities. Production
activities occur in a 65,000 square foot leased building in a neighboring
suburb. Midwest Suburban Publishing utilizes one building for editorial,
pre-press, marketing sales and administrative activities. Production activities
occur at a separate facility. Both facilities are located in Chicago's south
suburbs. The Post-Tribune owns and utilizes a building in Gary, Indiana for all
activities. Construction is underway on a new business office in
Merrillville, Indiana to house all editorial, marketing, sales and
administrative functions. The Gary location will continue to be used for
production.
COMMUNITY GROUP
The Community Group has various operating and production facilities for
its community publications in the United States. The group uses modern data
processing equipment in its business management operations and in its
typesetting. The group believes that all of its properties are in generally good
condition, well maintained and adequate for their current operations. The
group's operating and production facilities for its community publications are
owned or leased by its subsidiaries, with lease terms ranging from two to five
years.
The Jerusalem Post is produced and distributed in Israel from a
three-story building in Jerusalem owned by Jerusalem Post. The Jerusalem Post
also leases a sales office in Tel Aviv and a sales and distribution office in
New York. The Jerusalem Post also owns certain properties held for investment in
Jerusalem.
U.K. NEWSPAPER GROUP
The Telegraph occupies five floors of a tower on Canary Wharf in
London's Docklands under a 25-year lease expiring in 2017. Printing of The
Telegraph's newspaper titles is carried out at fifty percent owned joint venture
printing plants in London's Docklands and in Trafford Park, Manchester.
CANADIAN NEWSPAPER GROUP
The Canadian Newspaper Group's newspapers and magazines are
published at numerous facilities throughout Canada. The Group publishes
predominantly all of its newspapers and performs all pre-press work on its
magazines in facilities owned by the Company. Southam's magazines are printed at
facilities owned by third parties. Southam has constructed new production
facilities in Vancouver and Windsor, Ontario, which began production in late
1997. New presses have been commissioned in Montreal, Regina and Saskatoon. The
Company believes that its facilities are adequate to meet production needs.
-18-
21
ITEM 3. LEGAL PROCEEDINGS
The Company becomes involved from time to time in various claims and
lawsuits incidental to the ordinary course of its business, including such
matters as libel, defamation and invasion of privacy actions. In addition, the
Company is involved from time to time in various governmental and administrative
proceedings with respect to employee terminations and other labor matters,
environmental compliance, tax and other matters.
Management believes that the outcome of any pending claims or
proceedings will not have a material adverse effect on the Company taken as a
whole. See Note 16 to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names and ages (as of March 20,
2000) of each of the Company's current executive officers, followed by a
description of their principal occupations during the past five years and
current directorships of public reporting companies and investment companies in
the United States, Canada and the United Kingdom. Unless otherwise indicated,
each of the executive officers has held his or her position with the Company, or
a similar position with the Company, for at least the past five years.
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
The Hon. Conrad M. Black,
P.C., O.C. 55 Chairman of the Board, Chief Executive Officer and Director
F. David Radler 57 Deputy Chairman, President, Chief Operating Officer and Director
Daniel W. Colson 52 Vice Chairman and Director and Deputy Chairman and Chief Executive
Officer of The Telegraph
Cindy E. Horowitz 45 Executive Vice President and Chief Financial Officer
J. A. Boultbee 56 Executive Vice President
Frederick A. Creasey 49 Group Corporate Controller
Barbara Amiel Black 59 Vice President, Editorial and Director
Paul B. Healy 36 Vice President, Corporate Development and Investor Relations
Peter Y. Atkinson 54 Vice President
Mark S. Kipnis 52 Vice President, Corporate Counsel and Secretary
John D. Ferguson 58 Vice President, Production
Frederic R. Lebolt 46 Vice President, New Media
Robert T. Smith 56 Treasurer
Jerry J. Strader 63 President, American Publishing Company
THE HON CONRAD M. BLACK, P.C., O.C., Chairman of the Board of
Directors, Chief Executive Officer and Director. Mr. Black has served as
Chairman of the Board of Directors and Chief Executive Officer since October 25,
1995, and has served as a Director since 1990. Mr. Black served as Deputy
Chairman of the Board of Directors from 1991 to October 25, 1995. Mr. Black
serves as the Chairman of the Board and Chief Executive Officer of Hollinger
Inc. and Hollinger Canadian Publishing Holdings Inc. ("HCPH"), both of which are
public reporting companies in Canada. He currently serves as the Chairman and a
Director of The Telegraph, Southam and Jerusalem Post, as Chairman of the Board,
Chief Executive Officer and a Director of Argus and Hollinger Canadian
Newspapers G.P. Inc. ("HCNGP"), the general partner of Hollinger Canadian
Newspapers, Limited Partnership, a public reporting company in Canada, as a
Director of EdperBrascan Limited and the Canadian Imperial Bank of Commerce,
both of which are public reporting companies in Canada, and as a Director of
Sotheby's Holding Inc. and as a Member of the Advisory Board of Gulfstream
Aerospace Corporation.
F. DAVID RADLER, Deputy Chairman, President, Chief Operating Officer
and Director. Mr. Radler has served as President and Chief Operating Officer
since October 25, 1995, as Deputy Chairman since May 1998, and a Director since
1990. Mr. Radler was Chairman of the Board of Directors from 1990 to October 25,
1995. Mr. Radler currently serves as President, Chief Operating Officer and
Deputy Chairman of Hollinger Inc. He currently serves as a director of The
Telegraph and HCNGP, and as Deputy Chairman, Associate Chief Executive Officer
and Director of Southam. Mr. Radler also serves as Vice Chairman, President and
Chief Operating Officer and as a Director of HCPH and as Director of Argus,
Dominion Malting Limited, and West Fraser Timber Co. Ltd., all of which are
Canadian public reporting companies. Mr. Radler also serves as a Director of the
Jerusalem Post.
DANIEL W. COLSON, Vice Chairman and Director of the Company and Deputy
Chairman, Chief Executive Officer and a Director of The Telegraph. Mr. Colson
has served as a Director of the Company since February 1995 and a Vice Chairman
since May 1998. He has served as Deputy Chairman of the Telegraph since 1995 and
as Chief Executive Officer of the Telegraph since 1994 and was Vice Chairman of
the Telegraph from 1992 to 1995. Mr. Colson currently serves as Vice Chairman
and as a Director of Hollinger Digital Inc., Southam and HCNGP. He also serves
as Vice Chairman and a Director of Hollinger Inc. and Hollinger Canadian
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23
Publishing Holdings Inc. and as Director of Argus and Molson Inc., all of which
are Canadian public reporting companies, Mr. Colson also serves as Deputy
Chairman and Director of Interactive Investor International Limited.
CINDY E. HOROWITZ, Executive Vice President and Chief Financial
Officer. Ms. Horowitz has served as Executive Vice President and Chief
Financial Officer of the Company since July 19, 1999. Prior to that, Ms.
Horowitz was Vice President and Chief Financial Officer of Primedia Inc.'s
Information Group for five years. From 1986 to 1994, Ms. Horowitz was Vice
President of Citibank, N.A. where she served in various financial management
positions including Chief Financial Officer of the Consumer Development
Division.
J. A. BOULTBEE, Executive Vice President. Mr. Boultbee has served as
Executive Vice President since June 14, 1996 and as Chief Financial Officer from
1995 to 1999. Mr. Boultbee served as a Vice President from 1990 to June 13,
1996. Mr. Boultbee served as a Director from 1990 to October 25, 1995. Mr.
Boultbee has served for the past five years as a Director and as the
Vice-President, Finance and Treasury and Executive Vice President and Chief
Financial Officer of Hollinger Inc. Mr. Boultbee serves as a Director of
Southam. Mr. Boultbee also serves as Executive Vice President and Chief
Financial Officer and as a Director of HCPH and as a Director of Argus, Iamgold
International African Mining Gold Corporation and Consolidated Enfield
Corporation, all of which are Canadian public reporting companies.
FREDERICK A. CREASEY, Group Corporate Controller. Mr. Creasey has
served as Group Corporate Controller since June 14, 1996. Mr. Creasey also has
served for the past five years as the Controller of Hollinger Inc. Mr. Creasey
also serves as Controller of HCPH.
BARBARA AMIEL BLACK, Vice President, Editorial and Director. Mrs. Black
has served as Vice President, Editorial since September 1995 and as a Director
since February 1996. Mrs. Black is the wife of Mr. Black. Mrs. Black is
currently a columnist for The Daily Telegraph. After an extensive career in both
on and off air television production, Mrs. Black was the editor of The Toronto
Sun from 1982 to 1984, a columnist of The Times and The Sunday Times of London
from 1986 to 1994 and a columnist of MacLean's magazine since 1976. Mrs. Black
also serves as Vice President, Editorial and as a Director of Hollinger Inc.
and HCPH and as a Director of Southam, HCNGP and the Jerusalem Post.
PAUL B. HEALY, Vice President, Corporate Development and Investor
Relations. Mr. Healy has served as Vice President, Corporate Development and
Investor Relations since October 25, 1995. Mr. Healy also serves as a Vice
President of HCPH. Mr. Healy was a Vice President of The Chase Manhattan Bank,
N.A. for more than five years prior to October 1995, serving as a corporate
finance specialist in the media and communications sector.
PETER Y. ATKINSON, Vice President. Mr. Atkinson has served as Vice
President since 1997. Mr. Atkinson has served as Vice President and Corporate
Counsel of Hollinger Inc. since 1996. Mr. Atkinson also serves as Vice President
and General Counsel and as a Director of HCPH. Mr. Atkinson was previously a
partner at the law firm of Aird & Berlis, which he joined in 1976.
MARK S. KIPNIS, Vice President and Secretary. Mr. Kipnis has served as
Vice President and Secretary since January 1998 and as a Director of Jerusalem
Post since 1999. Mr. Kipnis also serves as a Vice President of HCPH. Mr. Kipnis
was previously a partner at the law firm of Holleb & Coff, which he joined in
1974.
JOHN D. FERGUSON, Vice President, Production. Mr. Ferguson has served
as Vice President, Production since 1996. Mr. Ferguson served as Vice President,
Production at Southam from 1993 to 1996. Mr. Ferguson was previously Deputy
Managing Director of Mirror Group PLC, which he joined in 1966.
FREDERIC LEBOLT, Vice President New Media. Mr. Lebolt has served as
Vice President New Media since February 1999. He has served as Publisher of
Digital Chicago Magazine since 1998 and as Vice President of Hollinger Digital
Inc. since 1997. Mr. Lebolt was previously Director of Online Publications of
the Chicago Sun-Times , which he joined in 1994.
ROBERT T. SMITH, Treasurer. Mr. Smith has served as Treasurer since
May 1998. Mr. Smith was Vice President of Chase Securities, Inc. and The Chase
Manhattan Bank in the Media and Telecommunications Group from 1987 to 1998 and
1976 through 1982. From 1983 to 1987, Mr. Smith served as Assistant Treasurer
for AT&T Long Lines and AT&T Communications, AT&T's long distance subsidiary.
JERRY J. STRADER, President, American Publishing Company. Mr. Strader
was appointed President of the Company's Community Group (American Publishing
Company) in February of 1996. He served as Senior Vice President of American
Publishing Company from 1994 to 1996 and as a Regional Manager of American
Publishing Company and as publisher of The Meridian Star, one of the Company's
daily newspapers from 1990 to 1994.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Class A Common Stock is listed on the New York Stock Exchange under
the trading symbol "HLR." At March 20, 2000 there were 86,749,943 shares of
Class A Common Stock outstanding and held by approximately 250 holders of record
and approximately 6,000 beneficial owners. The Class B Common Stock of the
Company is not publicly traded. As of March 20, 2000, 14,990,000 shares of Class
B Common Stock were outstanding and owned by Hollinger Inc. In 1999, 134,126
shares Series D Preferred Stock held by Hollinger Inc. were converted into
134,126 shares of Series E Preferred Stock. The shares of Series E Preferred
Stock are convertible into 955,404 shares of Class A Common Stock (as of March
20, 2000). In 1996, the Company issued 20,700,000 Preferred Redeemable Increased
Dividend Equity Securities ("PRIDES"), each of which represented one-half share
of the Company's Series B Preferred Stock, par value $.01 per share. In 1998,
19,993,531 PRIDES were exchanged for 18,394,048 shares of Class A Common Stock.
The remaining PRIDES were exchanged in January 2000 for 596,189 shares of Class
A Common Stock of the Company. The PRIDES were listed on the New York Stock
Exchange. The Company has issued 829,409 shares of Series C Convertible
Preferred Stock, par value $0.1 per share ("Series C Preferred Stock") to
Hollinger Inc. The Series C Preferred Stock was issued at $108.50 per share and
pays a dividend of 9.5% per annum. The Series C Preferred Stock is convertible
into 8,181,788 shares of Class A Common Stock (as of March 20, 2000).
The following table sets forth for the periods indicated the high and
low sales prices for the Class A Common Stock, as reported by the New York Stock
Exchange Composite Transactions Tape for the period since January 1, 1998, and
the cash dividends declared per share on the Class A Common Stock.
PRICE RANGE CASH DIVIDENDS
------------------- DECLARED
CALENDAR PERIOD HIGH LOW PER SHARE
- --------------- ---- --- ---------
1998
First Quarter $17.188 $13.625 $0.1000
Second Quarter 17.125 14.875 0.1000
Third Quarter 18.313 13.438 0.1375
Fourth Quarter 14.375 12.125 0.1375
1999
First Quarter $14.938 $11.125 $0.1375
Second Quarter 16.813 11.875 0.1375
Third Quarter 13.250 9.813 0.1375
Fourth Quarter 13.625 9.750 0.1375
2000
First Quarter (through March 20, 2000) $13.563 $10.438 $0.1375
On March 20, 2000 the closing price of the Class A Common Stock was
$11.813 per share. Each share of Class A Common Stock and Class B Common Stock
is entitled to receive dividends if, as and when declared by the Board of
Directors of the Company. Dividends must be paid equally, share for share, on
both the Class A Common Stock and the Class B Common Stock at any time that
dividends are paid. Up until the first quarter of 1996, the Company paid a
quarterly dividend of $0.025 per share of common stock. As a result of the 1995
Reorganization, the Company had greater financial capacity to support
substantially higher level of dividends with respect to its common stock. From
the first quarter 1996 through the second quarter of 1998, the Company paid
a quarterly dividend of $0.10 per share of common stock. Since the third quarter
of 1998, the Company has paid a quarterly dividend of $0.1375 per share of
common stock.
As an international holding company, the Company's ability to declare
and pay dividends in the future with respect to its Common Stock will be
dependent, among other factors, upon its results of operations, financial
condition and cash requirements, the ability of its United States and foreign
subsidiaries to pay dividends and make payments to the Company under applicable
law and subject to restrictions contained in existing and future loan
agreements, the prior payments of dividends to holders of Series C Preferred
Stock and Series E Preferred Stock and other financing obligations to third
parties relating to such United States or foreign subsidiaries of the Company,
as well as foreign and United States tax liabilities with respect to dividends
and payments from those entities.
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25
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA: (1) (2)
Operating revenues:
Advertising $ 1,557,033 $ 1,565,790 $ 1,567,897 $ 1,364,527 $ 699,434
Circulation 487,002 517,629 523,591 562,122 301,724
Job printing 48,207 70,461 80,024 80,132 58,750
Other 55,160 43,880 40,018 67,241 18,606
----------- ----------- ----------- ----------- -----------
Total operating revenues 2,147,402 2,197,760 2,211,530 2,074,022 1,078,514
Operating costs and expenses 1,787,146 1,774,661 1,783,995 1,782,053 951,187
Infrequent items 22,046 26,172 25,243 41,567 8,000
Depreciation and amortization 125,408 114,848 114,570 102,435 57,463
----------- ----------- ----------- ----------- -----------
Operating income 212,802 282,079 287,722 147,967 61,864
Interest expense (131,600) (105,841) (113,558) (84,356) (44,727)
Amortization of debt issue costs (16,209) (5,869) (13,466) (16,640) (168)
Equity in earnings of affiliates (2,106) (1,199) 5,807 12,050 14,356
Other income, net (3) 349,939 337,470 77,644 70,917 18,199
----------- ----------- ----------- ----------- -----------
Earnings before income taxes, minority
interest and extraordinary item 412,826 506,640 244,149 129,938 49,524
Income taxes 155,203 223,099 93,655 51,865 20,564
----------- ----------- ----------- ----------- -----------
Earnings before minority interest and
extraordinary item 257,623 283,541 150,494 78,073 28,960
Minority interest 7,088 81,562 45,973 33,138 22,637
----------- ----------- ----------- ----------- -----------
Earnings before extraordinary item 250,535 201,979 104,521 44,935 6,323
Extraordinary item (5,183) (5,067) - (2,150) -
----------- ----------- ----------- ----------- -----------
Net earnings $ 245,352 $ 196,912 $ 104,521 $ 42,785 $ 6,323
=========== =========== =========== =========== ===========
Basic earnings per share $ 2.30 $ 1.65 $ 0.93 $ 0.41 $ 0.09
=========== =========== =========== =========== ===========
Cash dividends declared per common share
$ 0.55 $ 0.475 $ 0.40 $ 0.40 $ 0.10
=========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Working capital (deficit) $ (113,115) $ (141,688) $ 56,365 $ (695,760) $ (390,673)
Total assets (5) 3,503,024 3,251,724 3,023,921 3,425,544 1,737,980
Minority interest 155,901 107,002 203,034 109,943 97,298
Total long-term debt (4) 1,653,936 1,499,518 1,428,415 711,348 475,048
Redeemable preferred stock 13,591 31,562 75,891 605,579 306,452
Total stockholders' equity (6) 902,225 817,921 687,602 686,326 159,973
23
26
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
SEGMENT DATA:
Operating Revenues:
Chicago Group $ 390,473 $ 379,109 $ 341,368 $ 333,632 $ 332,575
Community Group 96,674 210,107 292,265 273,740 226,638
U.K. Newspaper Group 550,474 550,525 492,270 451,902 405,038
Canadian Newspaper Group 1,109,781 1,058,019 1,085,627 1,014,748 114,263
---------- ---------- ---------- ---------- ----------
Total Operating Revenues $2,147,402 $2,197,760 $2,211,530 $2,074,022 $1,078,514
========== ========== ========== ========== ==========
Operating Income (8):
Chicago Group $ 45,234 $ 34,093 $ 37,862 $ 16,723 $ 12,634
Community Group 9,471 38,312 53,453 47,158 27,491
U.K. Newspaper Group 70,007 66,458 49,224 33,928 27,000
Canadian Newspaper Group 110,136 169,388 172,426 91,725 2,739
---------- ---------- ---------- ---------- ----------
Total Operating Income $ 234,848 $ 308,251 $ 312,965 $ 189,534 $ 69,864
========== ========== ========== ========== ==========
EBITDA (7),(8):
Chicago Group $ 65,189 $ 54,404 $ 53,093 $ 34,268 $ 54,851
Community Group 18,571 57,579 79,880 72,439 27,288
U.K. Newspaper Group 88,964 85,871 67,300 48,245 37,374
Canadian Newspaper Group 187,532 225,245 227,262 137,017 7,814
---------- ---------- ---------- ---------- ----------
Total EBITDA $ 360,256 $ 423,099 $ 427,535 $ 291,969 $ 127,327
========== ========== ========== ========== ==========
- -----------------------------------
(1) The financial data presented above is derived from the Consolidated
Financial Statements of the Company. Such financial statements include
the accounts of The Telegraph and the Canadian Newspapers on an "as-if"
pooling-of-interests basis.
(2) Results of Southam are included in the statement of operations data as
equity earnings for 1995 and consolidated for 1999, 1998, 1997 and
1996.
(3) Other income, net primarily includes the gain on the sale of Fairfax,
gain on the sale of marketable securities, gain on sale of newspaper
operations, gain on the dilution of interest in Hollinger L.P., foreign
currency gains (losses) and interest and dividend income.
(4) Long-term debt does not include intercompany indebtedness owed to
Hollinger Inc.
(5) Includes intangible assets, net of accumulated amortization, which
amounted to $2,031,610,000 at December 31, 1999 and $1,858,750,000 at
December 31, 1998. Such intangible assets consist of the value of
acquired subscriber and advertiser lists, noncompetition agreements,
archives and goodwill. The amortization periods for intangible assets
do not exceed 40 years.
(6) See Consolidated Statements of Stockholders' Equity.
(7) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, minority interest, equity in earnings of
affiliates, amortization of debt issue costs, foreign currency gains
and losses and certain other income items. EBITDA is not intended to
represent an alternative to operating income (as determined in
accordance with generally accepted accounting principles) as an
indicator of the Company's operating performance, or to cash flows from
operating activities (as determined in accordance with generally
accepted accounting principles) as a measure of liquidity. The Company
believes that EBITDA largely determines its ability to fund current
operations and to service debt, due to the significant number of
acquisitions made by the Company which have resulted in non-cash
charges for depreciation and amortization. These non-cash charges have
adversely affected net earnings, but have not affected EBITDA.
(8) Excludes infrequent items.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW
OVERVIEW
The Company's business is concentrated in the publication of newspapers
in the United States, Canada, United Kingdom, and Israel. Revenues are derived
principally from advertising, paid circulation and, to a lesser extent, job
printing. Approximately 18% of the Company's total operating revenues in 1999
were attributable to the Chicago Group, approximately 4% were attributable to
the Community Group, approximately 26% were attributable to its U.K. Newspaper
Group, and approximately 52% were attributable to its Canadian Newspaper Group.
The Company's Chicago Group is comprised of the Chicago Sun-Times and suburban
newspapers in the Chicago metropolitan area. The Company's Community Group is
comprised of 22 newspapers and related publications and the Jerusalem Post. The
Company's U.K. Newspaper Group consists of the operations of the Telegraph Group
Ltd. ("Telegraph"), its subsidiaries and joint ventures. The Canadian Newspaper
Group consists of the operations of Southam Inc. ("Southam") and the Company's
investment in Hollinger Canadian Newspapers Limited Partnership ("Hollinger
L.P.").
In addition, the Company has developed a comprehensive Internet
strategy for the year 2000. Internet activities fall into three main areas: (1)
web sites related to the various print publications, which are 100% owned and
reported within the traditional segments; (2) joint ventures between our print
publications and non-publishing-related outsiders, where each adds value and
where the Company has a certain amount of control; and (3) minority investments
in unrelated third parties.
The print-related and joint venture strategy represents an opportunity
to fortify the newspapers in their local markets by providing them with the
necessary tools to offer a complete suite of on-line and print options for their
clients. The Company has stayed competitive by building significant web sites at
all our major divisions.
The Consolidated Financial Statements include the accounts of the
Company and its majority-owned subsidiaries. At December 31, 1999, 1998 and
1997, the Company's interest in Southam was 100.0%, 71.0% and 58.6%,
respectively. The Company's interest in Hollinger L.P. was 85.0% at December 31,
1999. Investments in less than majority-owned affiliated companies are accounted
for using the equity method of accounting. All intercompany balances and
transactions have been eliminated on consolidation.
SIGNIFICANT TRANSACTIONS
In January 1999, Hollinger Canadian Publishing Holdings Inc. ("HCPH")
acquired 19,845,118 outstanding Southam common shares which had been tendered
pursuant to HCPH's offer to all Southam shareholders to acquire the shares for
Cdn.$25.25 cash per share after payment by Southam of a special dividend of
Cdn.$7.00 per share. The aggregate consideration paid was $327.5 million and
this purchase of shares brought the Company's ownership interest in Southam to
approximately 97%. The purchase price was funded through HCPH's portion of the
Southam special dividend together with borrowings by HCPH under the Bank Credit
Facility. In February 1999, HCPH purchased the remaining Southam common shares
pursuant to applicable Canadian law for aggregate consideration of $36.5
million.
During 1999, the Company solicited consents from the registered holders
of the Senior Notes and Senior Subordinated Notes to amend the indentures
covering said notes to (i) make the limitation on restricted payments covenant
less restrictive, (ii) make the consolidated cash flow ratio under the
limitation on indebtedness covenant more restrictive, and (iii) make the
limitation on sale of assets covenant less restrictive. The requisite consents
were obtained in March 1999 and the indentures governing the Senior Notes and
Senior Subordinated Notes were so amended.
In February 1999, the Company completed the sale of 45 U.S. community
newspaper properties for approximately $460.0 million, of which approximately
$441.0 million was cash. The proceeds from the sale were used to pay down
outstanding debt on the Bank Credit Facility. A pre-tax gain resulting from this
transaction of approximately $249.2 million was recognized on this transaction.
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28
During 1999, the Company sold to Horizon Publications Inc. 33 U.S.
community newspapers for $43.7 million resulting in a pre-tax gain of
approximately $20.7 million. Horizon Publications Inc. is managed by former
Community Group executives and owned by current and former Hollinger
International Inc. executives. Throughout 1999, the Company acquired five
community newspapers in the U.S. for total consideration of $24.5 million.
In April 1999, the Company formed Hollinger L.P. Hollinger L.P.
acquired 48 daily newspapers, 180 non-daily newspapers and shopping guides and
106 magazines and specialty publications located across Canada from Southam,
UniMedia Inc. and Sterling Newspapers Company in exchange for promissory notes
due April 29, 2020 of $309.5 million (Cdn.$451.2 million) and 135,945,972 units
in Hollinger L.P. The transfer of properties to Hollinger L.P. has been
accounted for at historical carrying values and no gain was recognized on the
transfer.
On April 30, 1999, Hollinger L.P. completed a Cdn.$200.0 million
($137.2 million) private placement and investors subsequently received 20
million partnership units of Hollinger L.P. During July 1999 Hollinger L.P.
completed its initial public offering issuing 4 million units at Cdn.$10 per
unit for total proceeds of Cdn.$40.0 million ($27.0 million). All partnership
units, including the 20 million units issued through the April 30, 1999 private
placement, are now listed on The Toronto Stock Exchange. After the initial
public offering the Company continued to hold indirectly approximately 85% of
the equity of Hollinger L.P. The net proceeds of the offerings were applied to
reduce bank debt of the Hollinger International group of companies. The
reduction in the Company's indirect ownership interest in Hollinger L.P. due to
the sales of partnership units resulted in the recognition of dilution gains of
$77.3 million. The Company's indirect ownership in the equity of the Hollinger
L.P. was 85.0% at December 31, 1999.
On April 30, 1999, Hollinger International Publishing Inc
("Publishing"), HCPH, Telegraph, Southam, Hollinger International Finance Corp.
("HIF") and a group of financial institutions entered into a Fourth Amended and
Restated Credit Facility ("Restated Credit Facility") for a total of $725.0
million consisting of a $475.0 million revolving credit line maturing on
September 30, 2004 and a $250.0 million term loan maturing on December 31, 2004.
This facility replaced the previous Bank Credit Facility. The Loans under the
Restated Credit Facility bear interest, at the option of the respective
borrower, at a rate per annum tied to specified floating rates or a reserve
adjusted Eurocurrency rate, in each case plus a specified margin determined
based on leverage ratios. On June 4, 1999, the revolving credit line was
increased by $50.0 million. On September 30, 1999, the Restated Credit Facility
was increased to $875.0 million when the revolving credit line and the term loan
were each increased by $50.0 million.
In January 1998, the Company completed a sale of approximately 80
community newspapers for aggregate cash consideration of approximately $310.0
million. The proceeds from the sale were used to pay off notes at the Community
Group and pay down $175.0 million of outstanding debt on the Bank Credit
Facility. A pre-tax gain of $201.2 million was recognized on this transaction.
In addition, its Canadian subsidiaries, in three separate transactions in 1998,
sold a magazine and four newspaper properties for total proceeds of $267.4
million resulting in pre-tax gains of $161.8 million.
In three separate transactions in 1998, the Company and its
subsidiaries acquired five daily and certain community newspapers for a total
cash consideration of $250.3 million. Included in these transactions was the
acquisition by Southam of the Financial Post Company, which published the
Financial Post. In October 1998, Southam launched the National Post, a new
national daily newspaper in Canada, incorporating the Financial Post as the
business section of the National Post.
During 1998 the Company issued an exchange offer to convert the
Preferred Redeemable Increased Dividend Equity Securities ("PRIDES') into Class
A Common Stock. 19,993,531 PRIDES were exchanged for 18,394,048 shares of Class
A Common Stock.
During 1997, HCPH acquired 6,552,425 additional shares of Southam,
increasing its ownership interest to 58.6% from 50.7%. During 1998, HCPH
acquired 8,268,900 additional shares of Southam increasing its ownership
interest to 69.1%. Subsequently, Southam repurchased some its own common shares
increasing the Company's ownership interest to 71.0%.
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29
In 1997 the Company and Hollinger Inc. announced that they had reached
an agreement for the transfer by Hollinger Inc. of its Canadian publishing
interests to HCPH for an aggregate consideration of approximately $382.0 million
(Cdn.$523.0 million). The purchase price was satisfied by payment of cash in the
amount of $250.0 million, by the issuance of a new series of preferred stock of
the Company, which was converted into 829,409 shares of Series C Preferred
Stock, a new series of mandatorily convertible preferred stock of the Company
similar to the PRIDES issued by the Company in August 1996 having a face value
of $90.0 million, and 3,207,245 shares of Class A Common Stock of the Company
having a nominal agreed value of $42.0 million. The mandatorily convertible
preferred stock was issued for a price of $108.50 per share and pays quarterly
dividends of 9.5% per annum.
In March 1997, Publishing issued offerings of $260 million of Senior
Notes due 2005 (the "Senior Notes") and $290 million of Senior Subordinated
Notes due 2007 (the "Senior Subordinated Notes"). Both the Senior Notes and the
Senior Subordinated Notes are guaranteed by the Company. Publishing and its
restricted subsidiaries utilized the proceeds of these offerings to repay bank
indebtedness, to repay the redeemable preference shares of DT Holdings Limited
("DTH") and First DT Holdings Limited ("FDTH") and for general working capital.
SUBSEQUENT EVENTS
At December 31, 1999, 353,234 Series B shares were outstanding, which
underlie 706,469 PRIDES. In January 2000, these PRIDES were converted into
596,189 shares of Class A Common Stock of the Company.
At December 31, 1999, the Company owned 51.7 million shares in
Interactive Investor International (III) at a cost of approximately $15.0
million and representing an approximate 47.0% equity interest. On February 17,
2000, III had its initial public offering (IPO) issuing 52.0 million shares at
(pound)1.50 ($2.42). The Company sold 5.0 million shares of its holding into the
IPO. After the IPO, the Company now owns 46.7 million shares representing 28.5%
of the equity of III. Shares in III have traded substantially above their issue
price indicating a significant gain to the Company. However, the Company is
precluded from selling its holding for a period of six months from the date of
the IPO.
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30
The following table sets forth, for the periods indicated, certain
items and related percentage relationships included in the Company's
Consolidated Statements of Operations.
Year Ended December 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
(dollars in thousands)
Operating revenues
Chicago Group $ 390,473 $ 379,109 $ 341,368
Community Group 96,674 210,107 292,265
U.K. Newspaper Group 550,474 550,525 492,270
Canadian Newspaper Group 1,109,781 1,058,019 1,085,627
------------ ------------ ------------
Total operating revenue $ 2,147,402 $ 2,197,760 $ 2,211,530
============ ============ ============
Operating income (4), (5)
Chicago Group $ 45,234 $ 34,093 $ 37,862
Community Group 9,471 38,312 53,453
U.K. Newspaper Group 70,007 66,458 49,224
Canadian Newspaper Group 110,136 169,388 172,426
------------ ------------ ------------
Total operating income $ 234,848 $ 308,251 $ 312,965
============ ============ ============
EBITDA (2), (4), (5)
Chicago Group $ 65,189 $ 54,404 $ 53,093
Community Group 18,571 57,579 79,880
U.K. Newspaper Group 88,964 85,871 67,300
Canadian Newspaper Group 187,532 225,245 227,262
------------ ------------ ------------
Total EBITDA $ 360,256 $ 423,099 $ 427,535
============ ============ ============
Operating revenues
Chicago Group 18.2% 17.3% 15.4%
Community Group 4.5% 9.6% 13.2%
U.K. Newspaper Group 25.6% 25.0% 22.3%
Canadian Newspaper Group 51.7% 48.1% 49.1%
------------ ------------ ------------
Total operating revenue 100.0% 100.0% 100.0%
============ ============ ============
Operating income
Chicago Group 19.3% 11.1% 12.1%
Community Group 4.0% 12.4% 17.1%
U.K. Newspaper Group 29.8% 21.5% 15.7%
Canadian Newspaper Group 46.9% 55.0% 55.1%
------------ ------------ ------------
Total operating income 100.0% 100.0% 100.0%
============ ============ ============
EBITDA
Chicago Group 18.0% 12.9% 12.4%
Community Group 5.2% 13.6% 18.7%
U.K. Newspaper Group 24.7% 20.3% 15.7%
Canadian Newspaper Group 52.1% 53.2% 53.2%
------------ ------------ ------------
Total EBITDA 100.0% 100.0% 100.0%
============ ============ ============
EBITDA Margin (3)
Chicago Group 16.7% 14.4% 15.6%
Community Group 19.2% 27.4% 27.3%
U.K. Newspaper Group 16.2% 15.6% 13.7%
Canadian Newspaper Group 16.9% 21.3% 20.9%
Total EBITDA 16.8% 19.3% 19.3%
(Footnotes following tables)
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31
The following table sets forth, for the periods indicated, certain
items and related percentage relationships included in the Company's
Consolidated Statements of Operations.
Year Ended December 31, Year Ended December 31,
---------------------------------- ------------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
(dollar amounts in thousands)
Chicago Group
Operating revenue
Advertising $294,124 $281,615 $243,301 75.4% 74.3% 71.3%
Circulation 80,551 82,534 79,574 20.6 21.8 23.3
Job printing and other 15,798 14,960 18,493 4.0 3.9 5.4
-------- -------- -------- -------- -------- --------
Total operating revenue 390,473 379,109 341,368 100.0 100.0 100.0
-------- -------- -------- -------- -------- --------
Operating costs (1), (4), (5)
Newsprint 64,408 71,101 60,254 16.5 18.8 17.7
Compensation costs 147,951 145,635 131,256 37.9 38.4 38.5
Other operating costs 112,925 107,969 96,765 28.9 28.5 28.3
Depreciation 8,929 9,207 8,603 2.3 2.4 2.5
Amortization 11,026 11,104 6,628 2.8 2.9 1.9
-------- -------- -------- -------- -------- --------
Total operating costs 345,239 345,016 303,506 88.4 91.0 88.9
-------- -------- -------- -------- -------- --------
Operating income (1), (5) $ 45,234 $ 34,093 $ 37,862 11.6% 9.0% 11.1%
======== ======== ======== ======== ======== ========
Community Group
Operating revenue
Advertising $ 57,535 $135,216 $190,215 59.5% 64.4% 65.1%
Circulation 26,618 49,449 69,499 27.5 23.5 23.8
Job printing and other 12,521 25,442 32,551 13.0 12.1 11.1
-------- -------- -------- -------- -------- --------
Total operating revenue 96,674 210,107 292,265 100.0 100.0 100.0
-------- -------- -------- -------- -------- --------
Operating costs (1), (4), (5)
Newsprint 9,355 23,173 29,048 9.7 11.0 9.9
Compensation costs 35,665 70,496 98,738 36.9 33.6 33.8
Other operating costs 33,083 58,859 84,599 34.2 28.0 28.9
Depreciation 3,956 7,185 10,485 4.1 3.4 3.6
Amortization 5,144 12,082 15,942 5.3 5.8 5.5
-------- -------- -------- -------- -------- --------
Total operating costs 87,203 171,795 238,812 90.2 81.8 81.7
-------- -------- -------- -------- -------- --------
Operating income (1), (5) $ 9,471 $ 38,312 $ 53,453 9.8% 18.2% 18.3%
======== ======== ======== ======== ======== ========
(Footnotes following tables)
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32
The following table sets forth, for the periods indicated, certain
items and related percentage relationships included in the Company's
Consolidated Statements of Operations.
Year Ended December 31, Year Ended December 31,
---------------------------------------- ------------------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
(dollar amounts in thousands)
U.K. Newspaper Group
Operating revenue
Advertising $ 365,005 $ 366,742 $ 335,115 66.3% 66.7% 68.1%
Circulation 158,683 163,206 137,073 28.8 29.6 27.8
Job printing and other 26,786 20,577 20,082 4.9 3.7 4.1
---------- ---------- ---------- ---------- ---------- ----------
Total operating revenue 550,474 550,525 492,270 100.0 100.0 100.0
---------- ---------- ---------- ---------- ---------- ----------
Operating costs (1), (4), (5)
Newsprint 97,045 101,750 89,851 17.6 18.5 18.3
Compensation costs 91,870 88,604 86,887 16.7 16.1 17.7
Other operating costs 272,595 274,300 248,232 49.5 49.8 50.4
Depreciation 8,522 8,739 7,535 1.5 1.6 1.5
Amortization 10,435 10,674 10,541 1.9 1.9 2.1
---------- ---------- ---------- ---------- ---------- ----------
Total operating costs 480,467 484,067 443,046 87.2 87.9 90.0
---------- ---------- ---------- ---------- ---------- ----------
Operating income (1), (5) $ 70,007 $ 66,458 $ 49,224 12.8% 12.1% 10.0%
========== ========== ========== ========== ========== ==========
Canadian Newspaper Group
Operating revenue
Advertising $ 840,369 $ 782,217 $ 799,266 75.8% 74.0% 73.6%
Circulation 221,150 222,440 237,445 19.9 21.0 21.9
Job printing and other 48,262 53,362 48,916 4.3 5.0 4.5
---------- ---------- ---------- ---------- ---------- ----------
Total operating revenue 1,109,781 1,058,019 1,085,627 100.0 100.0 100.0
---------- ---------- ---------- ---------- ---------- ----------
Operating costs (1), (4), (5)
Newsprint 140,042 147,785 132,857 12.6 14.0 12.2
Compensation costs 408,879 394,391 419,272 36.8 37.3 38.6
Other operating costs 373,328 290,598 306,236 33.6 27.4 28.2
Depreciation 42,746 34,711 35,012 3.9 3.3 3.3
Amortization 34,650 21,146 19,824 3.1 2.0 1.8
---------- ---------- ---------- ---------- ---------- ----------
Total operating costs 999,645 888,631 913,201 90.0 84.0 84.1
---------- ---------- ---------- ---------- ---------- ----------
Operating income (1), (5) $ 110,136 $ 169,388 $ 172,426 10.0% 16.0% 15.9%
========== ========== ========== ========== ========== ==========
(1) Percentage relationships are expressed as a percentage of related
revenues.
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, minority interest, equity in earnings of
affiliates, amortization of debt issue costs, foreign currency gains
and losses, extraordinary items and certain other income items. EBITDA
is not intended to represent an alternative to operating income (as
determined in accordance with generally accepted accounting principles)
as an indicator of the Company's operating performance, or cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles) as a measure of liquidity. The Company
believes that EBITDA largely determines its ability to fund current
operations and to service debt. The significant number of acquisitions
made by the Company have resulted in non-cash charges for depreciation
and amortization, which have adversely affected net income, but have
not affected EBITDA.
(3) EBITDA Margin represents EBITDA divided by related operating revenues.
(4) Includes allocation of corporate expenses.
(5) Excludes infrequent items.
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33
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998
NET EARNINGS The Company had net earnings of $245.4 million, or $2.30
per share in 1999, compared with net earnings of $196.9 million, or $1.65 per
share in 1998. Earnings in 1999 and 1998 include a number of infrequent and
non-recurring items. For the year ended December 31, 1999, earnings excluding
infrequent and non-recurring items were $62.1 million compared to $95.8 million
in 1998. Assuming all instruments are dilutive, diluted earnings per share
excluding infrequent and non-recurring items were 53 cents per share in 1999
compared to 78 cents per share in 1998.
OPERATING INCOME Operating income in 1999 was $212.8 million compared
to $282.1 million in 1998. The decrease in operating income is due to several
factors. Community Group newspaper operations sold during 1998 and 1999
contributed $30.6 million to reported operating income in 1998 and $1.2 million
in 1999. In addition, operating income in both 1999 and 1998 was affected by
start-up losses at the National Post of $48.7 million and $7.9 million,
respectively. Operating income in 1999 was also affected increased amortization
of intangibles related to the acquisition of the remaining Southam shares in
January 1999 and increased losses from Internet activities.
OPERATING REVENUES Operating revenues were $2,147.4 million in 1999
compared to $2,197.8 million in 1998, a decrease of $50.4 million. The overall
decrease in revenue is primarily due to the 1999 and 1998 sales of newspaper
operations at the Community Group and the Canadian Newspaper Group. Newspaper
operations sold contributed $204.3 million to operating revenues in 1998 and
$17.9 million in 1999. The decreases in operating revenues resulting from these
sales were offset, to a large extent, by operating revenues from the National
Post, which commenced operations in October 1998 and 1998 acquisitions at the
Canadian Newspaper Group..
OPERATING EXPENSES Total operating costs and expenses were $1,934.6
million in 1999 compared to $1,915.7 million in 1998. Newsprint expense
decreased over the prior year by 9.6%. The decrease in newsprint expense is
primarily due to the decrease in newsprint price. Newsprint prices decreased by
9.8% at the Chicago Group, 10.5% at the Community Group, 5.7% at the U.K.
Newspaper Group and 9.9% at the Canadian Newspaper Group. Lower consumption as a
result of the sale of newspaper operations at the Community Group was largely
offset by an increase in consumption at the Canadian Newspaper Group primarily
resulting from the National Post. Compensation costs decreased year over year by
$14.8 million or 2.1%. The overall reduction in compensation costs was due to
the sales of newspaper operations at the Community Group offset in part by
increased compensation resulting from the full year of operation of the National
Post. Other operating costs increased $60.2 million year over year mainly as a
result of 1999 including a full year of operations of the National Post offset
by lower other operating costs at the Community Group as a result of the sale of
newspaper operations. Amortization increased year over year by $6.2 million
primarily as a result of increased amortization of intangibles related to the
acquisition of the remaining Southam shares in January 1999, offset by reduced
amortization at the Community Group as a result of the sale of newspaper
operations. Operating expenses included $22.0 million of infrequent items in
1999, which consisted primarily of costs related to the start-up of the new
plant in Chicago and accounting adjustments related to pension liabilities.
Operating expenses included infrequent items of $26.2 million in 1998, which
included $13.1 million of start-up costs relating to the National Post and other
one-time charges.
OTHER INCOME Other income of $326.3 million in 1999 consisted primarily
of gains on sales of newspaper operations at the Community Group and the gain on
the dilution of the Company's interest in Hollinger L.P. Other income of $331.4
million in 1998 consisted primarily of the gains on sales of newspaper
operations at the Community Group and Canadian Newspaper Group.
INTEREST EXPENSE Interest expense increased 24.3% primarily due to
interest on additional debt incurred related to the acquisition of the Southam
minority in January 1999 and the repurchases in 1999 of the Company's common
stock.
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34
AMORTIZATION OF DEBT ISSUE COSTS Amortization of debt issue costs
represents debt issue costs on the Senior Notes, Senior Subordinated Notes and
the Bank Credit Facility. Amortization of debt issue costs in 1999 included
regular amortization of these costs and a one-time write-off of issue costs
related to debt incurred to buyout the Southam minority in January 1999.
MINORITY INTEREST Minority interest in 1999 represents the minority
interest in the earnings of Hollinger L.P. and in 1998 represents the minority
interest in earnings of Southam.
CHICAGO GROUP
Operating revenues for the Chicago Group were $390.5 million in 1999
compared with $379.1 million in 1998. Operating revenues for operations owned in
both years were $388.0 million in 1999 compared to $379.1 million in 1998. The
"same store" revenue growth is driven by a 3.7% increase in advertising revenues
primarily at the Chicago Sun-Times offset by a 2.8% reduction in circulation
revenue due to both price competition and lower circulation volume.
Total operating costs and expenses, excluding infrequent items, were
$345.2 million in 1999 compared with $345.0 million in 1998. Operating income
was $45.2 million in 1999 compared with $34.1 million in 1998. This improvement
was driven by increased advertising revenue and a newsprint price improvement
year over year of 9.8% across the group. For newspapers owned in both years
EBITDA increased 19.1% to $64.8 million in 1999 from $54.4 million in 1998 and
operating income increased 33.1% to $45.4 million from $34.1 million in 1998.
COMMUNITY GROUP
Operating revenues for the Community Group were $96.7 million in 1999
compared with $210.1 million in 1998. The decrease in operating revenues was the
result of the sale of newspaper operations in 1999. Operating revenues for
newspapers owned in both years were $50.7 million in 1999 compared with $50.1
million in 1998; EBITDA was $14.3 million in 1999 compared with $13.4 million in
1998 and operating income was $9.6 million in 1999 compared with $8.0 million in
1998. This improvement in operating income and EBITDA results from a slight
improvement in operating revenue as well as a 10.5% year over year reduction in
newsprint prices. Newspaper operations sold contributed $17.3 million to
operating revenue in 1999 and $139.2 million in 1998.
U.K. NEWSPAPER GROUP
Operating revenues for the U.K. Newspaper Group were flat year over
year. However, when expressed in British pounds sterling, total operating
revenues increased by 2.4% and advertising revenues increased 1.9%. Advertising
revenues continued to increase primarily a result of a continued buoyant
advertising market in all sectors except recruitment advertising. However, the
slowdown in recruitment classifieds was more than offset by growth in other
classified categories and display advertising. Also, recruitment advertising
turned the corner, showing a year-over-year increase of 3.0% for the fourth
quarter 1999. In British pounds sterling, circulation revenues were flat year
over year and other operating revenue in 1999 increased 33.6% over 1998. The
increases are primarily due to increased revenue from Telegraph Enterprises, a
division of Telegraph Group Limited, which uses the Telegraph brand to
facilitate sales of goods and services to readers.
Total operating costs and expenses, excluding infrequent items, were
$480.5 million in 1999 compared to $484.1 million in 1998. Newsprint expense was
$97.0 million in 1999 compared with $101.8 million in 1998, a decrease of $4.8
million. This reflects a 5.7% year over year price decrease offset in part by a
consumption increase. The newsprint price improvement, although less than
reported for United States properties, reflects the longer term purchasing
methodology in the U.K. which usually causes a delay in realizing the effect of
newsprint changes and should result in smaller price swings during periods of
increasing newsprint prices. Operating income, excluding infrequent items,
increased $3.5 million from 1998.
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35
CANADIAN NEWSPAPER GROUP
Operating revenues in the Canadian Newspaper Group were $1,110.0
million in 1999 compared with $1,058.0 million in 1998, an increase of $52.0
million or 4.9%. Most of this increase resulted from revenues from the National
Post, in its first full year of operation and 1999 revenues from operations
acquired during 1998 offset by lower 1999 revenue resulting from operations
which were sold in 1998. Revenues from newspapers owned in both years were
$914.5 million in 1999 and $910.9 million in 1998.
Total operating costs and expenses excluding infrequent items were
$999.6 million in 1999 compared with $888.6 million in 1998, an increase of
$111.0 million. Newsprint prices decreased 9.9% year over year, but overall
consumption increased primarily as a result of the National Post. Total
newsprint expense decreased $7.7 million or 5.2% from 1998. Compensation costs
increased $14.5 million year over year almost entirely as a result of 1999
including a full year of costs related to National Post. Compensation costs for
newspapers owned in both years were virtually flat. Other operating costs
increased $82.7 million to $373.3 million in 1999 from $290.6 million in 1998.
The majority of this increase results from a full year of other operating costs
of the National Post and an increase in Internet expenses. EBITDA from
newspapers owned in both years was $217.8 million in 1999 compared with $215.0
million in 1998. The National Post 1999 EBITDA loss was $44.3 million compared
with $7.2 million in 1998. In 1998 the National Post commenced publication
October 27.
Depreciation in 1999 increased $8.0 million over 1998 as a result of
fixed asset additions and the National Post. Amortization increased $13.5
million from $21.1 million in 1998 to $34.6 million in 1999 primarily due to the
additional amortization of intangible assets resulting from the 1998 and 1999
acquisitions of Southam shares.
1998 COMPARED WITH 1997
NET EARNINGS The Company had net earnings of $196.9 million, or $1.65
per share in 1998, compared with net earnings of $104.5 million, or $0.93 per
share in 1997. Earnings in 1998 and 1997 include a number of infrequent and
non-recurring items. For the year ended December 31, 1998, earnings excluding
infrequent and non-recurring items were $95.8 million compared to $72.6 million
in 1997. Assuming all instruments are dilutive, diluted earnings per share
excluding infrequent and non-recurring items were 78 cents per share in 1998
compared to 61 cents per share in 1997.
OPERATING INCOME Operating income in 1998 was $282.1 million compared
to $287.7 million in 1997. The operating income at the U.K. Newspaper Group
increased $33.5 million to $60.2 million in 1998 from $26.7 million in 1997,
principally as a result of increased advertising revenue and increased
circulation revenue due in part to higher subscription prices under the direct
subscription campaign. The decrease in operating income at both the Community
Group and the Canadian Newspaper Group was primarily due to sales of newspaper
operations. On a "same store" basis, operating income at the Community Group was
$37.4 million in 1998 compared to $35.0 million in 1997. Operating income on a
"same store" basis for the Canadian Newspaper Group was $184.9 million in 1998
compared to $176.8 million in 1997.
OPERATING REVENUES Operating revenues were $2,197.8 million in 1998
compared to $2,211.5 million in 1997. The overall decrease in revenue is
primarily due to sales of newspaper operations at the Community Group and the
Canadian Newspaper Group. Operations sold during 1998 contributed $218.7 million
to operating revenues in 1997. The decreases in operating revenues resulting
from these sales were offset, in part, by increases in advertising and
circulation revenues at the U.K. Newspaper Group of 9.4% and 19.1%, respectively
and operating revenues from 1998 acquisitions at the Chicago Group, Community
Group and Southam totaling $103.6 million.
OPERATING EXPENSES Total operating costs and expenses were $1,915.7
million in 1998 compared to $1,923.8 million in 1997. As a percentage of total
operating revenues, operating costs remained fairly consistent at 87.2% in 1998
compared to 87.0% in 1997. Newsprint expense increased over the prior year by
18.0% for the Chicago Group, decreased by 20.2% for the Community Group,
decreased by 0.5% for the U.K. Newspaper Group (including $12.4 million of
newsprint in 1997 related to the prepaid subscription campaign) and increased by
11.2% for the Canadian Newspaper Group. The increase in newsprint expense is due
to both increased newsprint prices and increased consumption. Newsprint prices,
which after declining in 1996 and early part of 1997, started to
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36
increase through the latter part of 1997 and continued to increase slightly
throughout 1998. Operating expenses included infrequent items of $26.2 million
in 1998, which included $13.1 million of start-up costs relating to the National
Post and other one-time charges. Operating expenses in 1997 included infrequent
items of $25.2 million that consisted primarily of $22.2 million for costs
related to the direct prepaid subscription campaign at the Telegraph.
OTHER INCOME Other income of $331.4 million in 1998 consisted primarily
of the gains on sales of newspaper operations at the Community Group and
Canadian Newspaper Group. Other income of $73.1 million in 1997 consisted mostly
of the gain on sale of Fairfax interest of $66.1 million and the gain on sale of
several U.S. community newspapers of $2.3 million.
INTEREST EXPENSE Interest expense decreased by $7.7 million. The
decrease in interest expense resulted from a decrease in long-term debt
resulting from the paydown of the AP-91 Senior Notes in January 1998 and lower
interest rates on the Bank Credit Facility.
AMORTIZATION OF DEBT ISSUE COSTS Amortization of debt issue costs
represents debt issue costs on the Senior Subordinated Notes issued in February
1996, the Senior Notes and Senior Subordinated Notes issued in February 1997 and
the Bank Credit Facility. Amortization of debt issue costs in 1997 included
regular amortization of these costs and a one-time write-off of balances in the
amount of $4.6 million.
INCOME TAXES Income tax expense for 1998 was $223.1 million compared
with $93.7 million in 1997. Income tax expense for 1998 included tax on the gain
on sale of newspaper operations and other non-recurring items and in 1997
included tax on the gain on sale of Fairfax.
MINORITY INTEREST Minority interest represents the minority interest in
earnings of Southam and dividends paid on redeemable preferred stock of two
subsidiary companies until they were redeemed in 1997. The amount attributable
to minority interest in earnings of Southam increased to $81.6 million in 1998
from $41.1 million in 1997, primarily as a result of the increase in earnings of
Southam from the gains on sales of certain newspaper properties, offset, in
part, by an increase in the Company's ownership in Southam.
CHICAGO GROUP
Operating revenues of the Chicago Group were $379.1 million in 1998 (or
17.3% of total operating revenues) compared with $341.4 million in 1997, an
increase of $37.7 million. Most of this increase is as a result of acquisitions.
For newspapers owned in both years, revenue was $343.9 million in 1998 compared
with $341.4 million in 1997, an increase of $2.5 million. Advertising revenue
increased $10.1 million or 4.1% while circulation revenue decreased $3.5 million
or 4.4%. The circulation revenue decrease was due to both price competition in
the Chicago market and lower circulation volume.
Total operating costs and expenses, excluding infrequent times, were
$345.0 million in 1998 compared with $303.5 million in 1997 an increase of $41.5
million. This increase relates to acquisitions, an increase in the year over
year cost of newsprint of 5.6% and also an increase in the consumption of
newsprint.
Operating income, excluding infrequent items, was $34.1 million in 1998
compared with $37.9 million in 1997.
COMMUNITY GROUP
Operating revenues at the Community Group were $210.1 million in 1998
(or 9.6% of total operating revenues) compared with $292.3 million in 1997, a
decrease of $82.2 million. This decrease in operating revenue was primarily the
result of the sale of newspaper operations in January 1998. Operating revenues
for newspapers owned in both years were $169.4 million in 1998 compared with
$165.0 million in 1997, an increase of $4.4 million. Advertising revenues
increased $5.0 million or 4.5% while circulation, printing and other revenues
decreased $0.6 million year over year.
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37
Total operating costs and expenses, excluding infrequent items, were
$171.8 million in 1998 compared with $238.8 million in 1997, a decrease of $67.0
million. This decrease relates primarily to the sale of newspaper operations
offset by an increase in newsprint expense resulting from both price and
consumption increases.
Operating income, excluding infrequent items, was $38.3 million in 1998
compared with $53.5 million in 1997. As a percentage of operating revenue,
operating income was 18.2% in 1998 compared with 18.3% in 1997. The sale of
newspaper operations in January 1998 resulted in the decline in operating
income.
U.K. NEWSPAPER GROUP
Operating revenues in the U.K. Newspaper Group were $550.5 million in
1998 (or 25.0% of total operating revenues), an increase of 11.8% from 1997.
When expressed in British pounds sterling, revenues increased by 10.6%.
Advertising revenues for 1998 increased $31.6 million to $366.7 million, or 9.4%
over 1997. When expressed in British pounds sterling, advertising revenues
increased 8.2%. Circulation revenues for 1997 were $163.2 million, an increase
of $26.1 million, or 19.1% from 1997. When expressed in British pounds sterling,
circulation revenues increased by 17.7%.
Total operating costs and expenses, excluding infrequent items were
$484.1 million in 1998, an increase of 9.3%, over 1997. Total operating costs
and expenses, excluding infrequent items, as a percentage of Telegraph revenues,
were 87.9% in 1998, compared with 90.0% in 1997. Newsprint expense decreased
0.5% from 1997 (including $12.4 million of newsprint in 1997 related to the
prepaid subscription campaign). The decrease is due to lower newsprint prices in
the U.K. offset, in part, by increase consumption as a result of increased
advertising.
Operating income, including the infrequent items, increased $33.6
million from 1997. As a percentage of revenues, operating income increased to
10.9% from 5.4%. The increase in operating income was primarily due to
participants in the direct subscription campaign renewing at higher prices and
increases in advertising revenues.
During 1996 the Telegraph began a program to solicit direct prepaid
subscriptions. In the past, newspaper subscribers in the U.K. dealt directly
with independent newsagents for the purchase of newspapers. A significant
portion of the Telegraph's newspaper readers did not take the paper every day
and this was especially true for Sunday. In the summer of 1996 the Telegraph
began a direct mail campaign to solicit prepaid seven-day-a-week subscriptions.
In order to gain broad acceptance of this revolutionary plan, the subscriptions
were offered at a significant discount. The amount of that discount was reduced
throughout 1997 and continued to decrease during 1998. During the first three
quarters of 1997 the net costs associated with the campaign amounted to $22.2
million and were grouped together and deducted separately in arriving at
operating income. In the fourth quarter of 1997, the net costs associated with
the campaign had declined and advertising revenue had increased, sufficient that
no separate charge was necessary.
CANADIAN NEWSPAPER GROUP
Operating revenues in the Canadian Newspaper Group were $1,058.0
million in 1998 (or 48.1% of total operating revenues), a decrease of 2.5% from
1997. The decrease in revenue is primarily due to the sale of certain newspaper
properties in the second and third quarter of 1998. For properties owned in both
years, total revenues in Canadian dollars increased 5.7%.
Total operating costs and expenses, excluding infrequent items, were
$888.6 million in 1998, a decrease of 2.7%, from 1997. Total operating costs and
expenses, excluding infrequent items, as a percentage of revenues remained
relatively flat at 84.0% in 1998 compared to 84.1% in 1997. Depreciation and
amortization increased $1.1 million to $55.9 million. This increase was due to
amortization of circulation and goodwill on the purchase of additional interests
in Southam in September 1998 and July 1997, partly offset by lower depreciation
due to sales of newspaper operations.
Operating income in 1998 was $152.3 million compared to $171.6 million
in 1997. As a percentage of revenues, operating income was 14.4% in 1998
compared to 15.8% in 1997. The decrease in operating income was due to the sale
of newspaper operations during 1998 and the special charge of $13.1 million for
start-up costs for the National Post. On a "same store" basis, operating income
for the Canadian Newspaper Group increased 4.6%;
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38
however, the results were affected by foreign currency rates. When expressed in
Canadian dollars, operating income on a "same store" basis increased 12.1%.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL Working capital consists of current assets less current
liabilities. Current assets were $417.0 million and $469.9 million at December
31, 1999 and 1998, respectively. Current liabilities, excluding debt
obligations, were $489.4 million and $509.9 million, respectively, at December
31, 1999 and 1998. The Company's consolidated working capital at December 31,
1999 and 1998, excluding debt obligations, was a deficit of $72.4 million and
$40.0 million, respectively.
EBITDA EBITDA, which represents the Company's earnings before interest
expense, income taxes, depreciation and amortization, minority interest,
amortization of debt issue costs, certain other income items and extraordinary
items was $338.2 million in 1999, $396.9 million in 1998 and $402.3 million in
1997, respectively. The Company believes that EBITDA largely determines its
ability to fund current operations and to service debt. EBITDA excluding
infrequent items was $360.3 million, $423.1 million and $427.5 million in 1999,
1998 and 1997, respectively.
CASH FLOW Cash flows on a consolidated basis from operating activities
were $106.2 million, $53.7 million and $242.8 million in 1999, 1998 and 1997,
respectively. Excluding changes in working capital (other than cash), cash
provided by operating activities was $62.0 million, $104.1 million and $265.1
million for 1999, 1998 and 1997, respectively. Working capital changes provided
cash of $44.2 million in 1999 and required cash of $50.4 million and $22.3
million in 1998 and 1997, respectively. Changes reflect normal variations from
year to year in inventory, accounts receivable, short-term liabilities and other
working capital items.
Cash flows used in investing activities in 1999 were $59.6 million
principally reflecting the capital expenditures at the Chicago Group for the new
production facility, acquisition of the remaining minority of Southam and
Internet related spending offset, in part, by proceeds from the disposition of
certain U.S. community newspapers. Cash flows used in investing activities were
$92.3 million in 1998 principally reflecting the acquisitions of the additional
interest in Southam, capital expenditures at the Chicago Group for the new
production facility, offset, in part, by net proceeds from dispositions of
certain newspapers at the Community Group and the Canadian Newspaper Group. Cash
flows provided by investing activities were $8.5 million in 1997 principally
reflecting proceeds from the disposal of Fairfax offset by capital expenditures
and acquisitions at the Community Group and Southam and the purchase of the
additional interest in Southam.
Cash flows used in financing activities in 1999 were $91.0 million,
principally reflecting the payment of by Southam of a special dividend, the
repurchase of Class A Common Stock by the Company offset, in part, by the
issuance of partnership units by Hollinger L.P. Cash flows used in financing
activities in 1998 were $15.8 million primarily reflecting changes in
borrowings, dividend payments and repurchase of its own shares by Southam. Cash
flows used in financing activities in 1997 were $276.9 million reflecting
changes in borrowings offset by the redemption of preference shares at DTH and
FDTH, payment of dividends and payments made to Hollinger Inc. for the Canadian
Newspapers.
CAPITAL EXPENDITURES AND ACQUISITION FINANCING In the past three years
the Chicago Group, the Community Group, the U.K. Newspaper Group and the
Canadian Newspaper Group have funded their capital expenditures and acquisition
and investment activities out of cash provided by their respective operating
activities and borrowings under their bank credit facilities.
Capital expenditures at the Chicago Group amounted to $40.9 million,
$75.6 million and $17.9 million in 1999, 1998 and 1997, respectively. The
Company began construction of a new printing facility in Chicago during 1998 at
an estimated cost of approximately $115.0 million, to be operational in 2000.
The capital expenditures in both 1999 and 1998 are primarily related to the
construction of this production facility.
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39
Capital expenditures at the Community Group amounted to $4.9 million,
$8.8 million and $8.8 million in 1999, 1998 and 1997, respectively.
Capital expenditures at the Telegraph were $5.6 million, $7.1 million
and $5.6 million in 1999, 1998, and 1997, respectively.
Capital expenditures at the Canadian Newspaper Group were $72.4
million, $69.2 million and $84.3 million in 1999, 1998, and 1997, respectively.
The capital expenditures in 1999 include new presses at Montreal, Saskatoon,
Regina and new equipment at the Vancouver press facility. The amounts in 1997
include $79.3 million for Southam, relating to the construction of a new press
facility in Vancouver, which was put into service in 1997.
DEBT OBLIGATIONS The Company, Publishing and its principal subsidiaries
are parties to various debt agreements that have been entered into to fund
acquisitions, working capital requirements and other corporate purposes. At
December 31, 1999, the indebtedness of the Company was $1,653.9 million.
1997 NOTE OFFERING On March 4, 1997, Publishing filed both a Prospectus
and a Prospectus Supplement offering $200 million of Senior Notes due 2005 (the
"Senior Notes") and $200 million of Senior Subordinated Notes due 2007 (the
"Senior Subordinated Notes"). On March 12, 1997, Publishing increased the size
of the offerings to $550.0 million, closing on March 18, 1997. Both the Senior
Notes and the Senior Subordinated Notes are guaranteed by the Company.
The Senior Notes are unsecured and senior obligations of Publishing and
rank pari-passu with all other senior unsecured indebtedness of Publishing
including Publishing's bank credit facilities, mature on March 15, 2005 and bear
interest at 8.625% per annum. The Senior Subordinated Notes are unsecured senior
subordinated obligations of Publishing and rank pari-passu with all other senior
subordinated indebtedness of Publishing including its existing 9.25% Senior
Subordinated Notes due 2006. The Senior Subordinated Notes mature on March 15,
2007 and bear interest payable semi-annually at a rate of 9.25% per annum. The
Indentures relating to the Senior Notes and the Senior Subordinated Notes
contain financial covenants and negative covenants that limit Publishing's
ability to, among other things, incur indebtedness, pay dividends or make other
distributions on its capital stock. The Company is in compliance with its
covenants.
Publishing and its restricted subsidiaries utilized the proceeds of
these offerings to repay bank indebtedness, to repay the redeemable preference
shares of DTH and FDTH and for general working capital.
1996 NOTE OFFERING Publishing sold $250 million aggregate principal
amount of Notes (the "Notes") on February 7, 1996. The Notes mature on February
1, 2006, and are unsecured senior subordinated obligations of Publishing. Each
Note bears interest at the rate of 9.25% per annum payable semiannually on
February 1 and August 1 of each year, commencing on August 1, 1996. The Notes
may be redeemed at any time on or after February 1, 2001, at the option of
Publishing, in whole or in part, at a price of 104.625% of the principal amount
thereof, declining ratably to par on or after February 1, 2004, together with
accrued and unpaid interest to the redemption date. Payment of the principal,
premium, and interest on the Notes is guaranteed by the Company on a senior
subordinated basis (the "Guarantee"). The Notes and the Guarantee are expressly
subordinated to all senior indebtedness of Publishing and the Company, including
all indebtedness and other obligations under the Publishing Credit Facility and
the Company's guarantee thereof.
The indenture relating to the Notes (the "Indenture") contains
covenants that, among other things, limit the ability of Publishing and the
Restricted Subsidiaries (defined to include the United States subsidiaries of
Publishing, the Telegraph, the Canadian Newspapers and Jerusalem Post) to incur
indebtedness, pay dividends or make other distributions on its capital stock,
subject in each case to certain exceptions. The Company is in compliance with
the covenants.
CONSENT SOLICITATION On February 19, 1997, Publishing completed a
solicitation of consents from the holders of the 9.25% Notes with respect to
certain amendments (the "Amendments") to the Indenture governing the 9.25% Notes
dated as of February 1, 1996 between Publishing and Fleet National Bank, as
trustee (the "Trustee"). The primary purpose of the Amendments was to facilitate
the inclusion of certain international subsidiaries of the Company as Restricted
Subsidiaries of Publishing and to enhance its corporate and financing
flexibility.
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During 1999, the Company solicited consents from the registered holders
of the Notes, Senior Notes and Senior Subordinated Notes to amend the indentures
covering said notes to (i) make the limitation on restricted payments covenant
less restrictive, (ii) make the consolidated cash flow ratio under the
limitation on indebtedness covenant more restrictive, and (iii) make the
limitation on sale of assets covenant less restrictive. The requisite consents
were obtained in March 1999 and the indentures governing the Notes, Senior Notes
and Senior Subordinated Notes were so amended.
BANK CREDIT FACILITY On April 30, 1999, Publishing, HCPH, Telegraph,
Southam, HIF and a group of financial institutions entered into a Fourth Amended
and Restated Credit Facility ("Restated Credit Facility") for a total of $725.0
million consisting of a $475.0 million revolving credit line maturing on
September 30, 2004 and a $250.0 million term loan maturing on December 31, 2004.
This facility replaced the previous Bank Credit Facility. The Loans under the
Restated Credit Facility bear interest, at the option of the respective
borrower, at a rate per annum tied to specified floating rates or a reserve
adjusted Eurocurrency rate, in each case plus a specified margin determined
based on leverage ratios. On June 4, 1999, the revolving credit line was
increased by $50.0 million. On September 30, 1999, the Restated Credit Facility
was increased to $875.0 million when the revolving credit line and the term loan
were each increased by $50.0 million.
The Bank Credit Facility was first entered into on April 7, 1997 by
Publishing, HCPH, the Telegraph and a group of financial institutions. The
purchase price of the Canadian Newspapers was financed in part through a $175.0
million borrowing by HCPH under the Bank Credit Facility. During 1997, the
parties to the Bank Credit Facility entered into several amendments to the Bank
Credit Facility which permitted HCPH to bid for the remaining shares of Southam
not currently owned by it and allowed Publishing to pay up to $20.0 million in
dividends to the Company for Class A Common Stock repurchases.
During 1998, the Bank Credit Facility was changed through several
amendments to decrease interest rates, expand the capital expenditures
limitations, increase the amount of dividends Publishing can pay to the Company
for Class A Common Stock repurchases from $20.0 million to $30.0 million,
increase the permitted regular quarterly dividend from Publishing to the Company
to $0.1375 per common share from $0.10 and permitted the sale of 45 U.S.
community newspapers. This Bank Credit Facility was subsequently replaced by the
Restated Credit Facility.
The Restated Credit Facility contains both affirmative and negative
covenants, and various financial covenants. The Company was in compliance with
all covenants at December 31, 1999.
REDEEMABLE PREFERRED STOCK The Company issued to Hollinger Inc. in
connection with the 1995 Reorganization in which the Company acquired Hollinger
Inc.'s interest in The Telegraph and Southam, 739,500 shares of Series A
Preferred Stock. The Series A Preferred Stock was subsequently exchanged for
Series D Preferred Stock. During 1998, 408,551 shares of Series D Preferred
Stock were converted into 2,795,165 shares of Class A Common Stock. In February
1999, 196,823 shares of Series D Preferred Stock were redeemed for cash of
$19,362,000. In May 1999, the remaining 134,126 shares of Series D Preferred
Stock were converted into 134,126 shares of Series E Preferred Stock. The shares
of Series E Preferred Stock are redeemable in whole or in part, at any time and
from time to time, subject to restrictions in the Company's credit facilities,
by the Company or by a holder of such shares.
TOTAL RETURN EQUITY SWAP In August and September 1998, the Company
entered into an arrangement with four banks, pursuant to which the banks
purchased 12,640,305 shares of the Company's Class A Common Stock. 2,522,600 of
these shares were purchased on the open market at an average price of $15.40 and
10,117,705 were purchased from affiliates of the Company at an average price of
$13.88. During 1999, an additional 1,469,600, shares were purchased on the open
market at an average price of $13.96. The Company has the option, quarterly, up
to and including September 30, 2000 to buy the shares from the banks at the same
cost or to have the banks resell those shares in the open market. In the latter
case, any gain or loss realized by the banks will be for the Company's account.
Until the Company purchases the shares, dividends paid on the shares belong to
the Company and the Company pays interest to the banks at the rate of LIBOR plus
a spread. If the Company's stock price falls below the average purchase price of
these shares, the Company is required to deposit cash or shares into an escrow
account as additional security. During 1999, the Company has issued 4,846,370
shares of Class A Common Stock
-38-
41
as additional security of which 3,250,900 shares were required to be deposited
in the escrow account at December 31, 1999. Consequently 1,595,470 shares, which
had been issued during 1999, were returned to the company after year-end.
HCPH SPECIAL SHARES HCPH issued 6,552,425 Cdn.$10 Non-Voting Special
Shares in July 1997 for a total issue price of Cdn.$65.5 million.
On July 18, 1997 HCPH, the Company and Montreal Trust Company of Canada
as trustee, entered into an Exchange Indenture providing for the exchange of the
HCPH special shares at the option of the holder ("Optional Exchange") at any
time after December 23, 1997 but prior to June 26, 2000, into Class A Common
Stock of the Company based on an exchange ratio set out in the Exchange
Indenture. Each HCPH special share will be automatically exchanged ("Mandatory
Exchange") on June 26, 2000 into a number of Class A Common Shares of the
Company equal to a) US$8.88 divided by b) 95% of the current market price of the
Class A Common Stock. Upon either an Optional Exchange or a Mandatory Exchange,
the Company will have the option in lieu of delivering all or any of the Class A
Common Stock issuable on exchange, to make a cash payment.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
NEWSPRINT Newsprint prices continued to fluctuate throughout 1999 and
on a consolidated basis newsprint expense amounted to $310.9 million ($343.8
million in 1998 and $312.0 million in 1997). Management believes that while
newsprint prices could continue to show wide price variations in the future,
prices in 2000 will likely be marginally higher than they were in 1999.
Operating divisions take steps to ensure that they have sufficient supply of
newsprint and have mitigated cost increases by adjusting pagination and page
sizes and printing and distributing practices. For the Company and subsidiaries,
total newsprint usage in 1999 was about 600,000 tonnes per annum. At those
levels of usage and based on properties and ownership levels at December 31,
1999, a change in the price of newsprint of $50 per ton would increase or
decrease net income by about $17.6 million.
INFLATION During the past three years, inflation has not had a material
effect on the Company's newspaper business in the United States, United Kingdom
and Canada.
INTEREST RATES The Company has significant debt on which interest is
calculated at floating rates. As a result the Company is vulnerable to changes
in interest rates. Increases in interest rates will reduce net earnings and
declines in interest rates can result in increased earnings. Based on debt at
December 31, 1999 which is subject to floating interest rates and December 31,
1999 ownership levels and foreign exchanges rates, a 1% change in the floating
interest rates would increase or decrease the Company's net earnings by
approximately $4.4 million.
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42
FOREIGN EXCHANGE RATES A substantial portion of the Company's income is
earned outside of the United States in currencies other than the United States
dollar. As a result the Company's income is vulnerable to changes in the value
of the United States dollar. Increases in the value of the United States dollar
can reduce net earnings and declines can result in increased earnings. Based on
1999 earnings and ownership levels, a $0.05 change in the important foreign
currencies would have the following effect on the Company's reported earnings:
Actual Average
1999 Rate Increase/Decrease
- ------------------------------------------------------------------------------------------------------------------------------------
United Kingdom $1.62/L. $970,000
Canada $0.67/Cdn.$ $5,600,000
- ------------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC MEDIA Management continues to hold the view that newspapers
will continue to be an important business segment. Among educated and affluent
people, indications are that strong newspaper readership will continue. In fact,
it is possible that readership will increase as the population ages.
Alternate forms of information delivery such as the Internet could
impact newspapers, but recognition of the Internet's potential combined with a
strong newspaper franchise could be a platform for Internet operations.
Newspaper readers can be offered a range of Internet services as varied as the
content. Virtually all newspapers are now published on the Internet as well as
in the traditional newsprint format. The concern most frequently expressed
regarding the commercial viability of newspapers is that they will lose their
classified advertising revenue. We have put our classified advertising on the
Internet and linked this with other newspapers to make regional or national
networks.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears beginning at page F-1 of
this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-41-
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT.
(1) FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES.
The consolidated financial statements filed as part of this
report appear beginning at page F-1.
(2) EXHIBITS.
PRIOR FILING OR
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
----------- ---------------------- ----------------------
2.1 UniMedia Class A Stock Purchase Agreement dated as of April Incorporated by reference
18, 1997 among Hollinger Inc., UniMedia Holding Company and to Exhibit 2.01 to Current
Hollinger International Inc. Report on Form 8-K dated
April 18, 1997.
2.2 UniMedia Class B Stock Purchase Agreement dated as of April Incorporated by reference
18, 1997 among Hollinger Inc., UniMedia Holding Company and to Exhibit 2.02 to Current
Hollinger International Inc. Report on Form 8-K dated
April 18, 1997.
2.3 Sterling Purchase Agreement dated as of April 18, 1997 Incorporated by reference
among Hollinger Inc. and Hollinger Canadian Publishing to Exhibit 2.03 to Current
Holdings Inc. Report on Form 8-K dated
April 18, 1997.
2.4 Purchase Agreement relating to the Senior Notes, dated Incorporated by reference
March 12, 1997 to Exhibit 1.01 to Current
Report on Form 8-K dated
March 18, 1997.
2.5 Purchase Agreement relating to the Senior Subordinated Incorporated by reference
Notes, dated March 12, 1997 to Exhibit 1.02 to Current
Report on Form 8-K dated
March 18, 1997.
3.1 Restated Certificate of Incorporation Incorporated by reference
to Exhibit 3.1 to Current
Report on Form 8-K dated
October 13, 1995
3.2 Bylaws, as amended and restated. Incorporated by reference
to Exhibit 3.2 to
Registration Statement on
Form S-1 (No. 33-74980)
3.3 Certificate of Designations for Series B Convertible Incorporated by reference
Preferred Stock to Exhibit 3.01 to Current
Report on Form 8-K dated
August 7, 1996.
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PRIOR FILING OR
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
----------- ---------------------- ----------------------
3.4 Certificate of Designations for Series C Convertible Incorporated by reference
Preferred Stock to Exhibit 1.1.3.2 to
Current Report on Form 8-K
dated May 5, 1997.
4.1 Fourth Amended and Restated Credit Agreement dated April Pursuant to S-K
30, 1999 among Hollinger International Publishing Inc., 601(b)(4)(iii), the
Telegraph Group Limited, Hollinger Canadian Publishing Registrant has not filed a
Holdings Inc., Southam Inc., HIF Inc., various financial copy of this exhibit but
institutions, The Toronto Dominion Bank, as Issuing Bank, will furnish a copy upon
the Bank of Nova Scotia, as Syndication Agent, Canadian the Commission's request.
Imperial Bank of Commerce, as Documentation Agent, and
Toronto Dominion (Texas), Inc., as Administrative Agent.
4.2 Senior Indenture, dated as of March 18, 1997 Incorporated by reference
to Exhibit 4.01 to Current
Report on Form 8-K dated
March 18, 1997
4.3 Senior Subordinated Indenture, dated as of March 18, 1997. Incorporated by reference
to Exhibit 4.03 to Current
Report on Form 8-K dated
March 18, 1997
4.4 Exchange Indenture, dated July 17, 1997, among Hollinger Incorporated by reference
Canadian Publishing Holdings Inc., Hollinger International to Exhibit 4.01 to
Inc. and Montreal Trust Company of Canada. Registration Statement on
Form S-3 (No. 333-35619)
4.5 Indenture dated as of February 7, 1996 among Hollinger Incorporated by reference
International Publishing Inc., Hollinger International Inc. to Exhibit 10.4 to Current
and Fleet National Bank of Connecticut as Trustee. Report on Form 8-K Dated
February 7, 1996
10.1 Services Agreement between the Company and Hollinger Inc., Incorporated by reference
as Amended and Restated as of February 7, 1996. to Exhibit 10.4 to Report
on Form 10-K for the year
ended December 31, 1995
10.2 Business Opportunities Agreement between the Company and Incorporated by reference
Hollinger Inc., as Amended and Restated as of February 7, to Exhibit 10.5 to Report
1996. on Form 10-K for the year
ended December 31, 1995
10.3 Employment and Noncompetition Letter Agreements with Incorporated by reference
executive officers. to Exhibit 10.9 to
Registration Statement on
Form S-1 (No. 33-74980)
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PRIOR FILING OR
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
----------- ---------------------- ----------------------
10.4 American Publishing Company 1994 Stock Option Plan. Incorporated by reference
to Exhibit 10.10 to
Registration Statement on
Form S-1 (No. 33-74980)
10.5 Hollinger International Inc. 1997 Stock Incentive Plan. Incorporated by reference
to Annex A to Report on
Form DEF 14A dated March
28, 1997
10.6 American Publishing Management Services, Inc. Executive Incorporated by reference
Benefit Plan. to Exhibit 10.11 to
Registration Statement on
Form S-1 (No. 33-74980)
10.7 Share Exchange Agreement dated as of July 19, 1995 between Incorporated by reference
Hollinger Inc. and American Publishing Company. to Exhibit 2.1 to Current
Report on Form 8-K Dated
July 18, 1995
10.8 HTH/FDTH Share Exchange Agreement dated as of July 19, 1995 Incorporated by reference
between Hollinger Inc. and First DT Holdings Limited. to Exhibit 2.1 to Current
Report on Form 8-K Dated
July 18, 1995
10.9 Deposit Agreement dated August 1, 1996. Incorporated by reference
to Exhibit 10.01 to Current
Report on Form 8-K dated
August 7, 1996
10.10 Exchange Agreement dated as of April 18, 1997 among Incorporated by reference
Hollinger International Inc., Hollinger Inc. and UniMedia to Exhibit 10.1 to Current
Holding Company. Report on Form 8-K dated
April 18, 1997.
10.11 Amendment, dated as of March 18, 1997, to the Share Incorporated by reference
Exchange Agreement. to Exhibit 10.1 to Current
Report on Form 8-K dated
March 18, 1997.
10.12 Hollinger International Inc 1999 Stock Incentive Plan Incorporated by reference to
Annex A to Report on Form
DEF 14A dated March 24, 1999
10.14 Amendment, dated as of March 18, 1997, to the HTH/FDTH Incorporated by reference
Share Exchange Agreement. to Exhibit 10.2 to Current
Report on Form 8-K dated
March 18, 1997.
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48
PRIOR FILING OR
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
----------- ---------------------- ----------------------
21.1 Significant Subsidiaries of Hollinger International Inc. Incorporated by reference
to Exhibit 21.1 to Report
on Form 10-K for the year
ended December 31, 1995
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None
-46-
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2000
HOLLINGER INTERNATIONAL INC.
(Registrant)
By: /s/ Conrad M. Black
-----------------------------------
Conrad M. Black, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Conrad M. Black Chairman, Chief Executive March 30, 2000
-------------------------------------- Officer and Director (Principal
Conrad M. Black Executive Officer)
/s/ Cindy E. Horowitz Executive Vice President and March 30, 2000
-------------------------------------- Chief Financial Officer
Cindy E. Horowitz (Principal Financial Officer)
/s/ Fredrick A. Creasey Group Corporate Controller March 30, 2000
-------------------------------------- (Principal Accounting Officer)
Frederick A. Creasey
/s/ F. David Radler Deputy Chairman, President, March 30, 2000
-------------------------------------- Chief Operating Officer and
F. David Radler Director
/s/ Daniel W. Colson Vice Chairman and Director March 30, 2000
--------------------------------------
Daniel W. Colson
/s/ Barbara Amiel Black Vice President - Editorial and March 30, 2000
-------------------------------------- Director
Barbara Amiel Black
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50
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Dwayne O. Andreas Director March 30, 2000
--------------------------------------
Dwayne O. Andreas
/s/ Richard R. Burt Director March 30, 2000
--------------------------------------
Richard R. Burt
Director March , 2000
--------------------------------------
Raymond G. Chambers
Director March , 2000
--------------------------------------
Henry A. Kissinger
/s/ Marie-Josee Kravis Director March 30, 2000
--------------------------------------
Marie-Josee Kravis
Director March , 2000
--------------------------------------
Shmuel Meitar
/s/ Richard N. Perle Director March 30, 2000
--------------------------------------
Richard N. Perle
/s/ Robert S. Strauss Director March 30, 2000
--------------------------------------
Robert S. Strauss
/s/ A. Alfred Taubman Director March 30, 2000
--------------------------------------
A. Alfred Taubman
/s/ James R. Thompson Director March 30, 2000
--------------------------------------
James R. Thompson
Director March , 2000
--------------------------------------
Lord Weidenfeld
/s/ Leslie H. Wexner Director March 30, 2000
--------------------------------------
Leslie H. Wexner
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51
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Hollinger International Inc.:
We have audited the accompanying consolidated balance sheets of Hollinger
International Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, comprehensive income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hollinger
International Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
February 16, 2000
Chicago, Illinois
F-1
52
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Statement of Significant Accounting Policies
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1. PRINCIPLES OF PRESENTATION AND CONSOLIDATION
Hollinger International Inc. (the "Company") is a subsidiary of
Hollinger Inc., a Canadian corporation. At December 31, 1999, Hollinger
Inc. owned 41.1% of the combined equity and 75.2% of the combined
voting power of the outstanding Common Stock of the Company, without
giving effect to conversion of the Company's remaining Series B
Convertible Preferred Stock ("Series B Preferred Stock"), Series C
Convertible Preferred Stock ("Series C Preferred Stock") or Series E
Redeemable Convertible Preferred Stock ("Series E Preferred Stock").
In 1997, the Company and Hollinger Inc. announced that they had reached
an agreement for the transfer by Hollinger Inc. of certain of its
directly or indirectly owned Canadian publishing interests to Hollinger
Canadian Publishing Holdings Inc. ("HCPH"), a subsidiary of the
Company, for an aggregate consideration of $382,000,000
(Cdn.$523,000,000), (the "Hollinger Inc. Transaction"). The purchase
price was satisfied in cash in the amount of $250,000,000, and by the
issuance of preferred stock of the Company, which was converted into
(i) 829,409 shares of Series C Preferred Stock having a face value of
$90,000,000, and (ii) 3,207,045 shares of Class A Common Stock having a
nominal agreed value of $42,000,000. The Hollinger Inc. Transaction
represented a combination of entities under common control and was
accounted for on an "as-if" pooling-of-interests basis.
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. The Company's interest in
Southam Inc. ("Southam") was 100.0%, 71.0% and 58.6% at December 31,
1999, 1998 and 1997, respectively. The Company's interest in Hollinger
Canadian Newspapers Limited Partnership ("Hollinger L.P.") was 85.0% at
December 31, 1999 (see Note 1 of Notes to Consolidated Financial
Statements for discussion of partnership formation). Investments in
less than majority-owned affiliated companies are accounted for using
the equity method. All significant intercompany balances and
transactions have been eliminated on consolidation.
2. DESCRIPTION OF BUSINESS
The Company is engaged in the publishing, printing and distribution of
newspapers and magazines through subsidiaries and affiliates primarily
in the United States, the United Kingdom, Canada and Israel. In
addition, the Company is developing a strategic on-line new media
presence. The Company's raw materials, mainly newsprint and ink, are
not dependent on a single or limited number of suppliers. Customers
range from individual subscribers to local and national advertisers.
F-2
53
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Statement of Significant Accounting Policies, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
3. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
4. CASH AND CASH EQUIVALENTS
Cash equivalents consist of certain highly liquid investments with
original maturities of three months or less.
5. INVENTORIES
Inventories consist principally of newsprint that is valued at the
lower of cost or net realizable value. Cost is determined using the
first-in, first-out (FIFO) method, except for newsprint inventories of
certain subsidiaries which are accounted for using the last-in,
first-out method (LIFO). At December 31, 1999 and December 31, 1998,
approximately 18% and 16%, respectively, of the Company's newsprint
inventories were valued using LIFO. If the FIFO method had been used,
such newsprint inventories would have been increased by $1,336,000 and
$1,573,000, respectively.
6. IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the recoverability of its long-lived assets, such
as property, plant and equipment and intangible assets, whenever events
or changes in business circumstances indicate the carrying amount of
the assets, or related group of assets, may not be fully recoverable.
The assessment of recoverability is based on management's estimate of
undiscounted future operating cash flows of its long-lived assets. If
the assessment indicates that the undiscounted operating cash flows do
not exceed the net book value of the long-lived assets, then a
permanent impairment has occurred. The Company would record the
difference between the net book value of the long-lived asset and the
fair value of such asset as a charge against income in the statement of
operations if such a difference arose. The Company determined that no
material permanent impairments had occurred at December 31, 1999.
F-3
54
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Statement of Significant Accounting Policies, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
7. DERIVATIVES
The Company is a limited user of derivative financial instruments to
manage risks generally associated with interest rate market volatility.
The Company does not hold or issue derivative financial instruments for
trading purposes. Amounts receivable under interest rate cap agreements
are accrued as a reduction of interest expense and amounts payable are
accrued as interest expense. Interest rate differentials on all other
swap arrangements are accrued as interest rates change over the
contract periods.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Routine maintenance
and repairs are expensed as incurred. Depreciation is calculated under
the straight-line method over the estimated useful lives of the assets,
principally 25 to 40 years for buildings and improvements and 3 to 10
years for machinery and equipment. Leasehold improvements are amortized
using the straight-line method over the shorter of the estimated useful
life of the asset and the lease term. Construction in progress for
production facilities is not depreciated until facilities are in use.
9. INTANGIBLE ASSETS
Intangible assets consist principally of circulation-related assets,
non-competition agreements with former owners of acquired newspapers
and the excess of acquisition costs over estimated fair value of net
assets acquired (goodwill). The fair market value of intangible assets
purchased is determined primarily through the use of independent
appraisals. Amortization is calculated using the straight-line method
over the respective estimated useful lives to a maximum of 40 years.
10. DEFERRED FINANCING COSTS
Deferred financing costs consist of certain costs incurred in
connection with debt financing. Such costs are amortized on a
straight-line basis over the remaining term of the related debt, up to
10 years.
11. DEFERRED REVENUE
Deferred revenue represents subscription payments that have not been
earned and are recognized on a straight-line basis over the term of the
related subscription.
F-4
55
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Statement of Significant Accounting Policies, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
12. INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the difference between financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
13. FOREIGN CURRENCY TRANSLATION
Foreign operations of the Company have been translated into U.S.
dollars in accordance with the principles prescribed in Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation."
All assets, liabilities and minority interests are translated at
year-end exchange rates, stockholders' equity is translated at
historical rates, and revenues and expenses are translated at the
average rates of exchange prevailing throughout the year. Translation
adjustments are included in the accumulated other comprehensive income
component of stockholders' equity. Translation adjustments are not
included in earnings unless they are actually realized through a
reduction of the Company's net investment in the foreign subsidiary.
Gains and losses arising from the Company's foreign currency
transactions are reflected in net earnings.
14. EARNINGS PER SHARE
For the years ended December 31, 1999, 1998 and 1997 earnings per share
was computed in accordance with Statement of Financial Accounting
Standards No. 128, which the Company adopted during the fourth quarter
of 1997. See note 10 for a reconciliation of the numerator and
denominator for the calculation of basic and diluted earnings per
share.
15. STOCK-BASED COMPENSATION
The Company utilizes the intrinsic value based method of accounting for
its stock-based compensation arrangements.
16. RECLASSIFICATIONS
Certain 1998 and 1997 amounts in the consolidated financial statements
have been reclassified to conform to the 1999 presentation.
F-5
56
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
ASSETS 1999 1998
---------- ----------
(in thousands)
Current assets:
Cash and cash equivalents $ 39,903 $ 57,788
Accounts receivable, net of allowance for doubtful accounts
of $23,346 in 1999 and $14,784 in 1998 334,383 333,706
Due from affiliates - 27,246
Inventories 28,217 32,312
Prepaid expenses and other current assets 14,448 18,872
---------- ----------
Total current assets 416,951 469,924
Investments (note 2) 208,166 143,338
Property, plant and equipment, net of accumulated depreciation (note 3) 711,627 661,611
Intangible assets, net of accumulated amortization of $230,479 in 1999
and $236,908 in 1998 2,031,610 1,858,750
Deferred financing costs and other assets 134,670 118,101
---------- ----------
$3,503,024 $3,251,724
========== ==========
F-6
57
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
----------- -----------
(in thousands)
Current liabilities:
Current installments of long-term debt (note 4) $ 40,695 $ 101,691
Accounts payable 119,481 137,691
Accrued expenses 229,110 285,859
Income taxes payable 61,259 13,890
Deferred revenue 79,521 72,481
----------- -----------
Total current liabilities 530,066 611,612
Long-term debt, less current installments (note 4) 1,613,241 1,397,827
Deferred income taxes (note 18) 213,753 207,667
Other liabilities 74,247 78,133
----------- -----------
Total liabilities 2,431,307 2,295,239
----------- -----------
Minority interest (note 6) 155,901 107,002
----------- -----------
Redeemable preferred stock (note 7) 13,591 31,562
----------- -----------
Stockholders' equity (note 8):
Convertible preferred stock 6,377 6,377
Class A common stock, $0.01 par value. Authorized 250,000,000
shares; issued and outstanding 99,759,469 and 95,572,430 shares in 1999
and 1998, respectively 998 956
Class B common stock, $0.01 par value. Authorized 50,000,000 shares;
issued and outstanding 14,990,000 shares in 1999 and 1998 150 150
Additional paid-in capital 652,705 610,440
Accumulated other comprehensive income:
Cumulative foreign currency translation adjustment (21,920) (65,799)
Unrealized loss on marketable equity securities (2,572) -
Retained earnings 475,315 301,133
----------- -----------
1,111,053 853,257
Class A common stock in treasury, at cost-11,962,462 shares in 1999
and 1,403,400 shares in 1998 (147,955) (16,744)
Issued shares in escrow-4,846,370 in 1999 and 1,363,293 in 1998
(note 11) (60,873) (18,592)
----------- -----------
Total stockholders' equity 902,225 817,921
----------- -----------
Commitments and contingencies (note 16)
$ 3,503,024 $ 3,251,724
=========== ===========
See statement of significant accounting policies and accompanying notes to
consolidated financial statements.
F-7
58
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Operations
for the Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands, except per share data)
Operating revenues:
Advertising $ 1,557,033 $ 1,565,790 $ 1,567,897
Circulation 487,002 517,629 523,591
Job printing 48,207 70,461 80,024
Other 55,160 43,880 40,018
----------- ----------- -----------
Total operating revenues 2,147,402 2,197,760 2,211,530
----------- ----------- -----------
Operating costs and expenses:
Newsprint 310,850 343,809 312,010
Compensation costs 684,365 699,126 736,153
Other operating costs 791,931 731,726 735,832
Infrequent items (note 12) 22,046 26,172 25,243
Depreciation 64,153 59,842 61,635
Amortization 61,255 55,006 52,935
----------- ----------- -----------
Total operating costs and expenses 1,934,600 1,915,681 1,923,808
----------- ----------- -----------
Operating income 212,802 282,079 287,722
----------- ----------- -----------
Other income (expense):
Interest expense (131,600) (105,841) (113,558)
Amortization of debt issue costs (16,209) (5,869) (13,466)
Interest and dividend income 7,716 8,231 9,924
Foreign currency gains (losses), net 13,774 (3,336) 459
Other income, net (note 13) 326,343 331,376 73,068
----------- ----------- -----------
Total other income (expense) 200,024 224,561 (43,573)
----------- ----------- -----------
Earnings before income taxes, minority interest and extraordinary
items 412,826 506,640 244,149
Income taxes (note 18) 155,203 223,099 93,655
----------- ----------- -----------
Earnings before minority interest and extraordinary items 257,623 283,541 150,494
Minority interest 7,088 81,562 45,973
----------- ----------- -----------
Earnings before extraordinary items 250,535 201,979 104,521
Extraordinary loss on debt extinguishments (5,183) (5,067) -
----------- ----------- -----------
Net earnings $ 245,352 $ 196,912 $ 104,521
=========== =========== ===========
Basic earnings per share before extraordinary items $ 2.35 $ 1.70 $ 0.93
=========== =========== ===========
Diluted earnings per share before extraordinary items $ 2.13 $ 1.47 $ 0.87
=========== =========== ===========
Basic earnings per share $ 2.30 $ 1.65 $ 0.93
=========== =========== ===========
Diluted earnings per share $ 2.09 $ 1.43 $ 0.87
=========== =========== ===========
See statement of significant accounting policies and accompanying notes to
consolidated financial statements.
F-8
59
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
Net earnings $ 245,352 $ 196,912 $ 104,521
Other comprehensive income:
Foreign currency translation adjustments 43,879 (37,821) (50,973)
Unrealized loss on marketable equity securities (2,572) - -
--------- --------- ---------
Comprehensive income $ 286,659 $ 159,091 $ 53,548
========= ========= =========
See statement of significant accounting policies and accompanying notes to
consolidated financial statements.
F-9
60
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
Accumulated
Convertible Common Additional other Issued
preferred stock paid-in comprehensive Retained Treasury shares
stock Class A & B capital income earnings stock in escrow Total
--------- --------- --------- --------- --------- --------- --------- ---------
(in thousands)
Balance at December 31, 1996 $ 195,104 $ 876 $ 336,609 $ 22,995 $ 130,742 $ - $ - $ 686,326
Shares issued for acquisition - - 1,000 - - - - 1,000
Cash dividends - Class A and
Class B, $0.40 per share - - - - (34,150) - - (34,150)
Dividends on redeemable
preferred stock - - - - (1,060) - - (1,060)
Dividends on convertible
preferred stock - - - - (22,408) - - (22,408)
Contribution by Hollinger Inc. - - 17,986 - (1,843) - - 16,143
Translation adjustments - - 3,276 (50,973) - - - (47,697)
Net earnings - - - - 104,521 - - 104,521
Common shares repurchased - - - - - (15,073) - (15,073)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 195,104 876 358,871 (27,978) 175,802 (15,073) - 687,602
Stock option exercise - 2 1,966 - - - - 1,968
Preferred stock conversion to Class A (188,727) 186 188,541 - - - - -
Series D conversion to Class A - 28 39,222 - - - - 39,250
Cash dividends - Class A and
Class B, $0.475 per share - - - - (46,985) - - (46,985)
Dividends on redeemable
preferred stock - - - - (736) - - (736)
Dividends on convertible
preferred stock - - - - (18,726) - - (18,726)
Deemed dividend - - - - (5,134) - - (5,134)
Translation adjustments - - 5,079 (37,821) - - - (32,742)
Net earnings - - - - 196,912 - - 196,912
Interest on forward share purchase - - (1,619) - - - - (1,619)
Common shares repurchased - - - - - (1,671) - (1,671)
Escrow shares on total return equity
swap - 14 18,380 - - - -
18,394
Shares issued in escrow - - - - - - (18,592) (18,592)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1998 6,377 1,106 610,440 (65,799) 301,133 (16,744) (18,592) 817,921
Stock option exercise - 1 1,303 - - - - 1,304
Share issue - - 92 - - - - 92
Cash dividends - Class A and
Class B, $0.55 per share - - - - (55,360) - - (55,360)
Dividends on redeemable
preferred stock - - - - (262) - - (262)
Dividends on convertible
preferred stock - - - - (9,221) - - (9,221)
Deemed dividend - - - - (6,327) - - (6,327)
Translation adjustments - - (1,420) 43,879 - - - 42,459
Unrealized loss on securities - - - (2,572) - - - (2,572)
Net earnings - - - - 245,352 - - 245,352
Interest on forward share purchase - - (6,042) - - - - (6,042)
Common shares repurchased - - - - - (123,497) - (123,497)
Escrow shares on total return equity
swap - 41 48,332 - - (7,714) - 40,659
Shares issued in escrow - - - - - - (42,281) (42,281)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 $ 6,377 $ 1,148 $ 652,705 $ (24,492) $ 475,315 $(147,955) $ (60,873) $ 902,225
========= ========= ========= ========= ========= ========= ========= =========
See statement of significant accounting policies and accompanying notes to
consolidated financial statements.
F-10
61
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands)
Cash flows from operating activities:
Net earnings $ 245,352 $ 196,912 $ 104,521
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 125,408 114,848 114,570
Deferred income taxes 6,086 75,530 62,016
Amortization of debt issue costs 16,209 5,869 13,466
Minority interest 7,088 81,562 45,973
Equity in earnings of affiliates, net of dividends received 1,734 (3,674) (5,851)
Gain on sale of investments - - (66,128)
Gain on sale of assets (336,708) (363,074) (3,286)
Amortization of deferred gain (1,616) (1,616) (1,616)
Other (1,541) (2,228) 1,408
Changes in assets and liabilities, net of acquisitions and dispositions:
Accounts receivable (17,922) (8,566) (4,556)
Inventories 3,224 (662) (3,064)
Prepaid expenses and other current assets 6,817 (12,072) (10,405)
Accounts payable (44,016) 38,809 (14,614)
Accrued expenses 48,259 (38,064) 16,701
Income taxes payable 55,716 (21,232) (7,209)
Deferred revenue and other (7,865) (8,604) 854
---------- ---------- ----------
Cash provided by operating activities 106,225 53,738 242,780
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property, plant and equipment (125,283) (163,997) (118,291)
Proceeds from sale of property, plant and equipment 12,087 22,098 5,613
Purchase of subsidiaries' stock and other investments (441,689) (223,967) (67,344)
Acquisitions, net of cash acquired (28,659) (332,507) (58,839)
Proceeds on disposal of investments and assets 520,040 601,980 247,418
Other 3,950 4,068 (104)
---------- ---------- ----------
Cash provided by (used in) investing activities $ (59,554) $ (92,325) $ 8,453
---------- ---------- ----------
F-11
62
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- --------------------------------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands)
Cash flows from financing activities:
Repayment of debt $(1,363,351) $ (246,140) $ (141,623)
Proceeds from issuance of bank debt 1,476,323 349,513 877,942
Repayment of bank loans - - (495,835)
Payment of debt issue costs (37,964) (12,343) (38,988)
Change in borrowings from affiliates 12,334 5,247 (302,587)
Net proceeds from issuance of equity 1,396 1,968 -
Issuance of common shares by a subsidiary 154,463 758 8,119
Repurchase of common shares (123,497) (1,671) (15,073)
Repurchase of common shares by a subsidiary - (36,124) -
Redemption of preference shares (19,362) - (116,863)
Dividends paid (64,843) (66,447) (57,618)
Contributions by Hollinger Inc. - - 16,143
Deemed dividend (6,327) (5,134) -
Dividends paid by subsidiaries to minority stockholders, net of
related swap income (112,539) (3,735) (10,443)
Other (7,664) (1,667) (98)
----------- ----------- -----------
Cash used in financing activities (91,031) (15,775) (276,924)
----------- ----------- -----------
Effect of exchange rate changes on cash 26,475 4,766 (15,475)
----------- ----------- -----------
Net decrease in cash and cash equivalents (17,885) (49,596) (41,166)
Cash and cash equivalents at beginning of year 57,788 107,384 148,550
----------- ----------- -----------
Cash and cash equivalents at end of year $ 39,903 $ 57,788 $ 107,384
=========== =========== ===========
See statement of significant accounting policies and accompanying notes to
consolidated financial statements.
F-12
63
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
(1) ACQUISITIONS AND DISPOSITIONS
(a) In April 1999, the Company formed Hollinger L.P. The Hollinger L.P.
acquired 48 daily newspapers, 180 non-daily newspapers and shopping guides
and 106 magazines and specialty publications located across Canada from
Southam, UniMedia Inc. and Sterling Newspapers Company in exchange for
promissory notes due April 29, 2020 of $309,500,000 (Cdn.$451,200,000) and
135,945,972 units in Hollinger L.P. The transfer of properties to Hollinger
L.P. has been accounted for at historical carrying values and no gain was
recognized on the transfer.
A Cdn.$200,000,000 ($137,200,000) private placement was completed April 30,
1999 and private placement investors subsequently received 20,000,000
partnership units of Hollinger L.P. During July 1999, Hollinger L.P.
completed its initial public offering issuing 4,000,000 units at Cdn.$10
per unit for total proceeds of Cdn.$40,000,000 ($27,000,000). All
partnership units, including the 20,000,000 units issued through the April
30, 1999 private placement, are now listed on The Toronto Stock Exchange.
After the initial public offering, the Company continued to hold indirectly
approximately 85% of the equity of Hollinger L.P. The net proceeds of the
offerings were applied to reduce bank debt of the Hollinger International
group of companies.
As a result of these investments by others in Hollinger L.P., the Company
recognized dilution gains of $77,297,000 recorded in other income (note
13). The Company's indirect ownership in the equity of the Hollinger L.P.
was 85.0% at December 31, 1999.
(b) In January 1999, HCPH acquired 19,845,118 outstanding Southam common shares
which had been tendered pursuant to HCPH's offer to all Southam
shareholders to acquire the shares for Cdn.$25.25 cash per share after
payment by Southam of a special dividend of Cdn.$7.00 per share. The
aggregate consideration paid was $327,500,000 and this purchase of shares
brought HCPH's ownership interest in Southam to approximately 97%. The
remaining Southam common shares were purchased by HCPH in February 1999
pursuant to applicable Canadian law for an aggregate consideration of
$36,500,000. Of the aggregate purchase price of these 1999 acquisitions,
$329,700,000 was ascribed to intangible assets.
F-13
64
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(c) In February 1999, the Company completed the sale of 45 U.S. community
newspapers for proceeds of approximately $460,000,000 of which
approximately $441,000,000 was cash. The proceeds from the sale were used
to pay down outstanding debt of the Bank Credit Facility. The pre-tax gain
of approximately $249,171,000 resulting from this transaction was recorded
in other income.
(d) During 1999, the Company sold to Horizon Publications Inc. 33 U.S.
community newspapers for $43,700,000 resulting in a pre-tax gain of
approximately $20,672,000. Horizon Publications Inc. is managed by former
Community Group executives and owned by current and former Hollinger
International Inc. executives.
(e) Throughout 1999, the Company acquired five community newspapers in the U.S.
for total consideration of $24,505,000. The excess purchase price of
$16,900,000 over the estimated fair value of tangible assets acquired was
recorded as identifiable intangibles and goodwill.
(f) In January 1998, the Company sold 80 community newspapers for total
proceeds of $310,000,000 resulting in a pre-tax gain of approximately
$201,245,000.
(g) In May 1998, Southam sold American Trucker magazine and related
publications and a paid daily circulation newspaper in Western Canada for
total proceeds of $93,672,000 resulting in a pre-tax gain of $56,058,000.
(h) In July 1998, the Company acquired two community newspapers for a total
cash price of $41,800,000. The excess purchase price of $39,350,000 over
the estimated fair value of tangible assets acquired was recorded as
identifiable intangibles and goodwill.
(i) In August 1998, HCPH acquired 8,268,900 additional shares of Southam for
$168,620,000, increasing its ownership interest at that time to 69.1% from
58.6%. Subsequent to August 1998, Southam repurchased some of its own
common shares, increasing the Company's ownership interest to 71.0%.
(j) In September 1998, in two separate transactions Southam acquired 100% of
The Financial Post Company, which published The Financial Post, a daily
newspaper in Canada. In addition, in July 1998, Southam acquired the
Victoria Times Colonist and the Nanaimo Daily News and certain community
newspapers on Vancouver Island in British Columbia, Canada. The total cost
of these acquisitions was $208,535,000. The excess purchase price of
$197,728,000 over the estimated fair value of tangible assets acquired was
recorded as identifiable intangibles and goodwill.
F-14
65
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
In a related transaction, in September 1998, Southam sold the Hamilton
Spectator and The Record (Kitchener-Waterloo) and HCPH sold the Cambridge
Record and the Guelph Mercury for total proceeds of $173,765,000 resulting
in a pre-tax gain of $105,771,000.
All of the above acquisitions are accounted for using the purchase method of
accounting. Based on estimated fair values of the acquired assets and
liabilities, the purchase price including direct costs is allocated to working
capital, property, plant and equipment, and intangible assets. The results of
the newspapers acquired are included in the consolidated results of operations
from the date of acquisition. The pro forma effect of the above acquisitions is
immaterial.
(2) INVESTMENTS
1999 1998
---------- ----------
(in thousands)
3396754 Canada Limited (note 6) $ 28,710 26,966
Joint ventures 25,237 24,768
Notes receivable from joint ventures 10,117 10,542
Advances under printing contracts with joint ventures 55,742 51,623
Investments in Internet related companies 58,691 21,737
Other 29,669 7,702
---------- ----------
$ 208,166 143,338
========== ==========
F-15
66
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(3) PROPERTY, PLANT AND EQUIPMENT
1999 1998
---------- ----------
(in thousands)
Land $ 51,815 55,333
Building and leasehold interests 230,414 242,941
Machinery and equipment 724,322 668,168
Construction in progress 139,889 94,867
---------- ----------
1,146,440 1,061,309
Less accumulated depreciation and amortization 434,813 399,698
---------- ----------
$ 711,627 661,611
========== ==========
Depreciation and amortization of property, plant and equipment totaled
$64,153,000, $59,842,000 and $61,635,000 in 1999, 1998 and 1997,
respectively. The Company capitalized interest in 1999 and 1998
amounting to $5,739,000 and $2,999,000, respectively, related to the
construction and equipping of production facilities for its newspaper
in Chicago. In 1997, the Company capitalized interest amounting to
$6,039,000 related to the construction of a production facility in
Canada.
F-16
67
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(4) LONG-TERM DEBT
1999 1998
---------- ----------
(in thousands)
Hollinger International Publishing Inc. ("Publishing"):
Senior Subordinated Notes due 2006 $ 250,000 250,000
Senior Notes due 2005 260,000 260,000
Senior Subordinated Notes due 2007 290,000 290,000
Bank Credit Facility due 2004 95,012 198,528
Hollinger International Finance Corp. ("HIF"):
Bank Credit Facility due 2004 299,985 -
United States Newspaper Group:
Amounts due under non-interest bearing
non-competition agreements due 2000-2007 4,282 4,277
Other due 2000-2009
(at varying interest rates up to 9%) 3,007 2,413
Telegraph Group Ltd. ("Telegraph"):
Obligations under capital leases (note 5) 6,367 10,877
HCPH:
Bank Credit Facility due 2004 244,864 291,965
Southam:
Bank Credit Facility due 2004 100,574 -
Unsecured bank credit facility - 56,390
Promissory notes
(at varying interest rates up to 6.0%) - 34,759
Notes due 2000-2007
(at varying interest rates up to 8.5%) 92,098 95,677
Other:
Other debt 6,895 4,632
Other capital leases 852 -
---------- ----------
1,653,936 1,499,518
Less current portion included in current liabilities 40,695 101,691
---------- ----------
$1,613,241 1,397,827
========== ==========
F-17
68
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(a) The following table summarizes the terms of the Publishing notes:
-----------------------------------------------------------------------------------------------------
Early Early
Interest Issue Redemption Redemption
Principal Rate Date Status Maturity Date Price
-----------------------------------------------------------------------------------------------------
$ 250,000,000 9.25% February 1,1996 Senior February 1, February 1, 2001-104.625%
Subordinated 2006 2001 or after 2002-103.085%
2003-101.545%
Thereafter-100%
-----------------------------------------------------------------------------------------------------
$ 260,000,000 8.625% March 18, 1997 Senior March 15, 2005 None -
-----------------------------------------------------------------------------------------------------
$ 290,000,000 9.25% March 18, 1997 Senior March 15, 2007 March 15, 2002-104.625%
Subordinated 2002 or after 2003-103.083%
2004-101.541%
Thereafter-100%
-----------------------------------------------------------------------------------------------------
Interest on these notes is payable semi-annually and the notes
are guaranteed by the Company.
The Indentures relating to the Senior Notes and Senior
Subordinated Notes contain similar financial covenants and
negative covenants that limit Publishing's ability to, among
other things, incur indebtedness, pay dividends or make other
distributions on its capital stock, enter into transactions with
affiliates, and sell assets including stock of a restricted
subsidiary. The Indentures provide that upon a Change of Control
(as defined in the Indentures), each noteholder has the right to
require Publishing to purchase all or any portion of such
noteholder's notes at a cash purchase price equal to 101% of the
principal amount of such notes, plus accrued and unpaid interest.
On January 28, 1999, the Company solicited consents from the
registered holders of the Senior Notes and Senior Subordinated
Notes to amend the indentures covering said notes to (i) make the
limitation on restricted payments covenant less restrictive, (ii)
make the consolidated cash flow ratio under the limitation on
indebtedness covenant more restrictive, and (iii) make the
limitation on sale of assets covenant less restrictive. The
requisite consents were obtained in March 1999 and the indentures
governing the Senior Notes and Senior Subordinated Notes were so
amended.
(b) On April 30, 1999, Publishing, HCPH, Telegraph, Southam, HIF
and a group of financial institutions entered into a Fourth
Amended and Restated Credit Facility ("Restated Credit Facility")
for a total of $725,000,000 consisting of a $475,000,000
revolving credit line maturing on September 30, 2004 and a
$250,000,000 term loan maturing on December 31, 2004. This
facility replaced the previous Bank Credit Facility. The Loans
under the Restated
F-18
69
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Credit Facility bear interest, at the option of the respective
borrower, at a rate per annum tied to specified floating rates or
a reserve adjusted Eurocurrency rate, in each case plus a
specified margin determined based on leverage ratios.
On June 4, 1999, the revolving credit line was increased by
$50,000,000. On September 30, 1999, the Restated Credit Facility
was increased to $875,000,000 when the revolving credit line and
the term loan were each increased by $50,000,000.
At December 31, 1999 Publishing had borrowings under the Restated
Credit Facility of $95,012,000, HCPH had borrowings of
$244,864,000, HIF had borrowings of $299,985,000 and Southam had
borrowings of $100,574,000. At December 31, 1999, the interest
rates on the Restated Credit Facility ranged from 6.8% to 9.4%.
On April 7, 1997, Publishing, HCPH, the Telegraph and a group of
financial institutions entered into a long-term bank credit
facility (the "Bank Credit Facility"). At December 31, 1998,
after a number of amendments and restatements, the Bank Credit
Facility was for a total of $625,000,000. At December 31, 1998
Publishing had borrowings under the Bank Credit Facility of
$198,528,000 and HCPH had borrowings of $291,965,000. At December
31, 1998, the interest rate on the Bank Credit Facility was 6.7%.
On February 2, 1999, the Bank Credit Facility was reduced by
$380,000,000 with part of the proceeds from the sale of the 45
U.S. community newspapers. The Bank Credit Facility was
subsequently replaced by the Restated Credit Facility
(c)(i) During December 1998, Southam entered into a six-month,
unsecured Cdn.$700,000,000 bank credit facility to facilitate
payment of an extraordinary dividend, to repay borrowings under
the previous Cdn.$310,000,000 credit facility and for general
corporate purposes. The Restated Credit Facility, described in
(b) above, replaced the six-month, unsecured Cdn.$700,000,000
facility. The amount borrowed at December 31, 1998 was
$56,390,000.
(ii) Southam has converted a portion of its variable rate
interest exposure to fixed rate by entering into a ten year
Cdn.$25,000,000 fixed rate interest swap at 8.7%, maturing May
2004. Southam pays interest at the fixed rate and it receives
interest based on the three-month banker's acceptance rate, which
is reset quarterly, on the nominal principal.
F-19
70
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(d) The Company's agreements with banks and other debtors contain
various restrictive provisions relating to maintenance of certain
financial ratios, restrictions on additional indebtedness,
occurrence of certain corporate transactions and limitations on
the amount of capital expenditures and restricted payments (which
generally include dividends and management fees). At December 31,
1999, the Company was in compliance with the aforementioned
restrictive provisions.
(e) Principal amounts payable on long-term debt, excluding
obligations under capital leases, are: 2000 - $37,041,000; 2001 -
$6,293,000; 2002 - $2,145,000, 2003 - $1,752,000 and 2004 -
$496,925,000.
(f) Interest paid for 1999, 1998 and 1997 was $132,534,000,
$118,563,000 and $89,661,000, respectively.
F-20
71
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(5) LEASES
The Company leases various facilities and equipment under
noncancelable operating lease arrangements. Rental expense under all
operating leases was approximately $ 14,936,000, $16,724,000 and
$15,422,000 in 1999, 1998 and 1997, respectively.
Minimum lease commitments together with the present value of
obligations at December 31, 1999 are as follows:
Capital Operating
leases leases
------------- -----------
(in thousands)
2000 $ 4,189 $ 15,370
2001 3,732 14,407
2002 - 12,220
2003 - 11,702
2004 - 12,218
Later years - 121,905
------------- -----------
7,921 $ 187,822
===========
Less imputed interest and executory costs 702
-------------
Present value of net minimum payments 7,219
Less current portion included in current liabilities 3,654
-------------
Long-term obligations $ 3,565
=============
Minimum lease payments have been reduced for rental income from
noncancelable subleases by approximately $94,000 in 2000.
F-21
72
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(6) MINORITY INTEREST
1999 1998
-------- --------
(in thousands)
Common shares of subsidiary $ 2,364 36,421
Partnership units 78,453 -
Special shares of HCPH 74,084 69,581
Other 1,000 1,000
-------- --------
$155,901 107,002
======== ========
In July 1997, HCPH issued 6,552,425 Cdn.$10 Non-Voting Special Shares
for a total issue price of Cdn.$65,524,000 ($47,564,000). These shares
are exchangeable, at the option of the holder, at any time after
December 23, 1997 and before June 26, 2000 into newly issued Class A
Common Stock of the Company. During that period the number of shares
that will be issued on exchange was 0.510 for the first six months,
increasing by 0.020 for each six-month period thereafter until June 8,
2000. At December 31, 1999, the exchange ratio was 0.590 shares of
Class A Common Stock per special share. For the period from June 9,
2000 through June 25, 2000, the exchange ratio will be 0.602 shares of
Class A Common Stock per special share. On June 26, 2000 any special
shares not previously exchanged will be exchanged for that number of
shares of Class A Common Stock equal to US$8.88 divided by 95% of the
then current market price of the Class A Common Stock. Upon either an
optional exchange or a mandatory exchange, the Company has the option
of paying cash in lieu of issuing Class A Common Stock. During 1999,
1,966 HCPH special shares were tendered for exchange and the Company
opted to pay $1,900 cash in exchange for the shares tendered.
In September 1997, an additional 4,146,107 Special Shares of HCPH were
issued for a total issue price of Cdn.$41,500,000 ($29,000,000) in
exchange for 4,146,107 special shares in 3396754 Canada Limited
("3396754"), a subsidiary of Hollinger Inc. These shares have the same
terms and conditions as the special shares described in the previous
paragraph. The Company's obligation to issue Class A Common Stock is,
however, offset by an obligation of Hollinger Inc., through a
subsidiary, to deliver those shares of Class A Common Stock from its
holdings. As a result, these shares do not represent an obligation of
the Company and will not ultimately lead to any increase in the number
of issued shares or to any dilution of earnings.
F-22
73
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(7) REDEEMABLE PREFERRED STOCK
In 1995, the Company issued 739,500 shares of Series A Preferred Stock
to Hollinger Inc. and these were subsequently converted into 739,500
shares of Series D Preferred Stock. On September 30, 1998, 408,551
shares of Series D Preferred Stock were converted by Hollinger Inc.
into 2,795,165 shares of Class A Common Stock and these shares were
purchased from Hollinger Inc. by a group of banks pursuant to the Total
Return Equity Swap described in note 11. In February 1999, 196,823
shares of Series D Preferred Stock were redeemed for cash of
$19,362,000 leaving 134,126 shares outstanding. In May 1999 the
remaining shares of Series D Preferred Stock were converted into
134,126 shares of Series E Preferred Stock.
Shares of Series E Preferred Stock are redeemable at the option of
either the holder or the Company at a price of Cdn.$146.63 ($101.54
based on December 31, 1999 exchange rates) plus accrued dividends. The
holder of these shares may, at any time, convert such shares into
shares of Class A Common Stock of the Company at a conversion price of
$14.00 per share of Class A Common Stock. The Series E Preferred Stock
ranks senior to the Series C Preferred Stock as to dividends and upon
liquidation. The Series E Preferred Stock is non-voting and is entitled
to receive cumulative cash dividends, payable quarterly. The amount of
each quarterly dividend per share is equal to the product of (a) the
redemption price of Cdn.$146.63 divided by the Canadian dollar
equivalent of the conversion price and (b) the per share amount of the
regularly scheduled dividend on Class A Common Stock. In 1999, the
dividend on the Series E Preferred Stock amounted to $1.95 per share.
At December 31, 1999, 134,126 shares of Series E Preferred Stock were
outstanding and based on exchange rates in effect on that day these
were exchangeable into 973,000 shares of Class A Common Stock of the
Company.
(8) STOCKHOLDERS' EQUITY
The Company is authorized to issue 20,000,000 shares of preferred stock
in one or more series and to designate the rights, preferences,
limitations and restrictions of and upon shares of each series,
including voting, redemption and conversion rights. In addition to the
Series E Preferred Stock referred to in note 7 above, the Company has
issued Series B and Series C Preferred Stock. The terms and conditions
of these shares are described below:
SERIES B
These shares underlie an issue of Preferred Redeemable Increased
Dividend Equity Securities ("PRIDES"). The PRIDES are depository shares
and each one, in effect, represents one-half of a share of Series B
Preferred Stock. Each PRIDES has a stated value of $9.75 and is
entitled to cumulative dividends at a rate of 9.75% per annum payable
quarterly. In July 1998, pursuant to an exchange offer, 19,993,531
PRIDES were exchanged for 18,394,048 shares of Class A Common Stock. At
December 31, 1999, 706,469 PRIDES were outstanding. The remaining
PRIDES were converted to 596,189 shares of Class A Common Stock in
January 2000.
F-23
74
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
SERIES C
Pursuant to the January 1997 transaction wherein HCPH acquired Canadian
publishing assets from Hollinger Inc., the Company issued 829,409
shares of Series C Preferred Stock. These shares are similar to the
PRIDES described above. The stated value of each share is $108.51 and
cumulative dividends are payable quarterly at 9.5% per annum of this
amount. Between June 1, 2000 and June 1, 2001, the Company can redeem
the Series C Preferred Stock based on the market value of the shares of
Class A Common Stock for no less than 8.503 shares of Class A Common
Stock per share of Series C Preferred Stock. If not previously
redeemed, the stock will mandatorily convert into 9.8646 shares of
Class A Common Stock on June 1, 2001. The Series C Preferred Stock
ranks junior to the Series E Preferred Stock as to dividends and upon
liquidation. The holders of Series C Preferred Stock have the right to
vote together as a single class with the holders of Class A and Class B
Common Stock in the election of Directors and upon each other matter
coming before the stockholders of the Company on the basis of ten votes
per share of Series C Preferred Stock. At the 8.503 conversion ratio,
these shares will convert into 7,052,464 shares of Class A Common
Stock. This conversion ratio will be in effect at any time that the
market value of the Class A Common Stock is $12.76 or higher.
CLASS A AND CLASS B COMMON STOCK
Class A Common Stock and Class B Common Stock have identical rights
with respect to cash dividends and in any sale or liquidation, but
different voting rights. Each share of Class A Common Stock is entitled
to one vote per share and each share of Class B Common Stock is
entitled to ten votes per share on all matters, including the election
of directors, where the two classes vote together as a single class.
Class B Common Stock is convertible at any time at the option of
Hollinger Inc. into Class A Common Stock on a share-for-share basis and
is transferable by Hollinger Inc. under certain conditions.
During the year, the Company repurchased 9,978,600 shares of Class A
Common Stock for approximately $123,500,000.
The contributions by Hollinger Inc. in 1997 represent amounts paid for
by Hollinger Inc. and net distributions prior to the Hollinger Inc.
Transaction.
F-24
75
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
GENERAL
A significant portion of the Company's operating income and net
earnings is derived from foreign subsidiaries and affiliated companies.
As an international holding company, the Company's ability to meet its
financial obligations is dependent upon the availability of cash flows
from foreign subsidiaries and affiliated companies (subject to
applicable withholding taxes) through dividends, intercompany advances,
management fees and other payments. The Company's subsidiaries and
affiliated companies are under no obligation to pay dividends.
(9) STOCK OPTION PLAN
During May 1994, the Company adopted the Hollinger International Inc.
1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan was amended in
September 1996 to increase the number of shares authorized for issuance
up to 1,471,140 shares. In 1997, the Company adopted the 1997 Stock
Incentive Plan (the "Incentive Plan"). The Incentive Plan provided for
awards of up to 5,156,915 shares of Class A Common Stock. The Incentive
Plan is administered by an independent committee ("Committee") of the
Board of Directors. The Committee has the authority to determine the
employees to whom awards will be made, the amount and type of awards,
and the other terms and conditions of the awards. In 1999, the Company
adopted the 1999 Stock Incentive Plan ("1999 Stock Plan") which
supersedes the previous two plans.
The 1999 Stock Plan provides for awards of up to 8,500,000 shares of
Class A Common Stock. The 1999 Stock Plan authorizes the grant of
incentive stock options and nonqualified stock options. The exercise
price for stock options must be at least equal to 100% of the fair
market value of the Class A Common Stock on the date of grant of such
option.
Southam had a stock option plan under which options had been granted to
executives and employees. At December 31, 1998, all options granted had
been exercised.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had the Company determined
compensation costs based on the fair value at the grant date of its
stock options under FASB Statement of Financial Accounting Standards
No. 123 (FAS 123), the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated in the
following table. The pro forma effect includes compensation expense
related to stock options at Southam in 1998 and 1997.
F-25
76
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands except per share amounts)
Net earnings as reported $ 245,352 196,912 104,521
Pro forma net earnings 242,704 194,017 102,469
Basic earnings per share as reported $ 2.30 1.65 0.93
Diluted earnings per share as reported 2.09 1.43 0.87
Pro forma basic earnings per share $ 2.27 1.62 0.90
Pro forma diluted earnings per share 2.07 1.41 0.85
----------- ----------- -----------
Pro forma net earnings reflect only options granted in 1995 through
1999. Therefore, the full impact of calculating compensation cost for
stock options under FAS 123 is not reflected in the pro forma net
earnings amounts presented above because compensation cost is reflected
over the options' vesting period of 4 years and the compensation cost
for options granted prior to January 1, 1995 is not considered.
Calculating the compensation cost consistent with FAS 123, the fair
value of each stock option granted during 1999, 1998 and 1997 was
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants
in fiscal 1999, 1998 and 1997, respectively: dividend yield of 4.5%,
3.4% and 2.9%; expected volatility of 32.7%, 43.3% and 25.7%; risk-free
interest rates of 6.4%, 5.1% and 5.4%, and expected lives of ten years.
Weighted average fair value of options granted by the Company during
1999, 1998 and 1997 was $3.81, $5.12 and $5.80, respectively.
F-26
77
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Stock option activity with respect to the Company's stock options was
as follows:
Number of Weighted Average
Shares Exercise Price
--------------- ---------------
Options outstanding at December 31, 1996 1,281,500 $ 11.65
Options granted 832,000 10.06
Options canceled (14,000) 9.71
--------------- ---------------
Options outstanding at December 31, 1997 2,099,500 11.01
Options granted 1,383,000 15.09
Options exercised (167,125) 11.78
Options canceled (167,750) 11.43
--------------- ---------------
Options outstanding at December 31, 1998 3,147,625 12.74
Options granted 3,475,000 12.27
Options exercised (116,000) 11.24
Options canceled (1,357,125) 14.93
--------------- ---------------
Options outstanding at December 31, 1999 5,149,500 $ 11.88
=============== ===============
Options exercisable at December 31, 1997 601,875 $ 12.22
Options exercisable at December 31, 1998 915,375 $ 11.65
Options exercisable at December 31, 1999 1,190,625 $ 11.36
=============== ===============
F-27
78
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(10) EARNINGS PER SHARE
The following table reconciles the numerator and denominator for the
calculation of basic and diluted earnings per share for the years ended
December 31, 1999, 1998 and 1997:
Year Ended December 31, 1999
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
(in thousands, except per share data)
Basic EPS
Net income available to common stockholders $ 235,869 102,553 $ 2.30
Effect of dilutive securities
Convertible preferred stock 9,221 8,778
Series E Preferred Stock 262 973
HCPH Special Shares - 4,930
Stock options - 376
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 245,352 117,610 $ 2.09
------------ ------------ ------------
F-28
79
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Year Ended December 31, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
(in thousands, except per share data)
Basic EPS
Net income available to common stockholders $ 156,541 94,839 $ 1.65
Effect of dilutive securities
Convertible preferred stock 18,726 18,763
Series D Preferred Stock 736 4,350
HCPH Special Shares - 4,661
Stock options - 521
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 176,003 123,134 $ 1.43
------------ ------------ ------------
For 1998, net earnings available to common shareholders has been reduced
by $20,909,000, which represents the conversion premium on the PRIDES
exchange.
Year Ended December 31, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
(in thousands, except per share data)
Basic EPS
Net income available to common stockholders $ 81,053 87,130 $ 0.93
Effect of dilutive securities
Convertible preferred stock 22,408 24,521
Series D Preferred Stock 1,060 5,421
HCPH Special Shares - 2,237
Stock options - 177
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 104,521 119,486 $ 0.87
------------ ------------ ------------
F-29
80
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(11) TOTAL RETURN EQUITY SWAP
In August and September 1998, the Company entered into an arrangement
with four banks, pursuant to which the banks purchased 12,640,305
shares of the Company's Class A Common Stock. 2,522,600 of these shares
were purchased on the open market at an average price of $15.40 and
10,117,705 were purchased from affiliates of the Company at an average
price of $13.88. During 1999, an additional 1,469,600, shares were
purchased on the open market at an average price of $13.96. The Company
has the option, quarterly, up to and including September 30, 2000 to
buy the shares from the banks at the same cost or to have the banks
resell those shares in the open market. In the latter case, any gain or
loss realized by the banks will be for the Company's account. Until the
Company purchases the shares, dividends paid on the shares belong to
the Company and the Company pays interest to the banks at the rate of
LIBOR plus a spread. If the Company's stock price falls below the
average purchase price of these shares, the Company is required to
deposit cash or shares into an escrow account as additional security.
During 1999, the Company issued 4,846,370 shares of Class A Common
Stock as additional security of which 3,250,900 shares were required to
be deposited in the escrow account at December 31, 1999. Consequently
1,595,470 shares, which had been issued during 1999, were returned to
the Company after year-end. At December 31, 1998, the Company had
issued 1,363,293 shares of Class A Common Stock to the banks as
additional security. Such escrow shares are shown as a deduction from
stockholders' equity. The total interest paid to the banks, net of
dividends paid on the shares, is shown as a reduction to additional
paid in capital on the balance sheet.
(12) INFREQUENT ITEMS
1999 1998 1997
---------- ---------- ----------
(in thousands)
Pension and post-retirement plan liability adjustment $ 11,943 - -
New Chicago plant pre-operating costs 4,398 - -
National Post launch costs - 13,112 -
Costs related to direct subscription campaign - - 22,191
Other 5,705 13,060 3,052
---------- ---------- ----------
$ 22,046 26,172 25,243
========== ========== ==========
F-30
81
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(13) OTHER INCOME
1999 1998 1997
--------- --------- ---------
(in thousands)
Net gains on sales of publishing interests (note 1) $ 270,017 363,074 66,128
Gain on sales of assets 3,561 - 2,768
Gain related to dilution of Hollinger L.P.
interest (note 1) 77,297 - -
Equity in earnings (loss) of affiliates (2,106) (1,199) 5,807
Other (22,426) (30,499) (1,635)
--------- --------- ---------
$ 326,343 331,376 73,068
--------- --------- ---------
(14) SEGMENT INFORMATION
The Company operates principally in the business of publishing,
printing and distribution of newspapers and magazines and holds
investments principally in companies that operate in the same business
as the Company. Southam, the Canadian Newspapers and Hollinger L.P.
make up the Canadian Newspaper Group. The following is a summary of the
segments of the Company:
Year ended December 31, 1999
-------------------------------------------------------------------------
U.K. Canadian
Chicago Community Newspaper Newspaper
Group Group Group Group Total
----------- ----------- ----------- ----------- -----------
(in thousands)
Revenues $ 390,473 96,674 550,474 1,109,781 $ 2,147,402
----------- ----------- ----------- ----------- -----------
Depreciation and amortization $ 19,955 9,100 18,957 77,396 $ 125,408
----------- ----------- ----------- ----------- -----------
Infrequent items $ 5,512 301 7,891 8,342 $ 22,046
----------- ----------- ----------- ----------- -----------
Operating income $ 39,722 9,170 62,116 101,794 $ 212,802
----------- ----------- ----------- ----------- -----------
Equity in earnings (loss) of
affiliates $ (482) - (2,140) 516 $ (2,106)
----------- ----------- ----------- ----------- -----------
Total assets $ 457,613 162,887 580,078 2,186,931 $ 3,387,509
----------- ----------- ----------- ----------- -----------
Capital expenditures $ 40,941 4,925 5,555 72,425 $ 123,846
----------- ----------- ----------- ----------- -----------
F-31
82
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Year ended December 31, 1998
------------------------------------------------------------------------
U.K. Canadian
Chicago Community Newspaper Newspaper
Group Group Group Group Total
----------- ----------- ----------- ----------- -----------
(in thousands)
Revenues $ 379,109 210,107 550,525 1,058,019 $ 2,197,760
----------- ----------- ----------- ----------- -----------
Depreciation and amortization $ 20,311 19,267 19,413 55,857 $ 114,848
----------- ----------- ----------- ----------- -----------
Infrequent items $ 825 2,000 6,250 17,097 $ 26,172
----------- ----------- ----------- ----------- -----------
Operating income $ 33,268 36,312 60,208 152,291 $ 282,079
----------- ----------- ----------- ----------- -----------
Equity in earnings (loss) of
affiliates $ (1,199) - - - $ (1,199)
----------- ----------- ----------- ----------- -----------
Total assets $ 429,882 409,604 619,637 1,685,960 $ 3,145,083
----------- ----------- ----------- ----------- -----------
Capital expenditures $ 75,647 8,825 7,114 69,211 $ 160,797
----------- ----------- ----------- ----------- -----------
Year ended December 31, 1997
------------------------------------------------------------------
U.K. Canadian
Chicago Community Newspaper Newspaper
Group Group Group Group Total
---------- ---------- ---------- ---------- ----------
(in thousands)
Revenues $ 341,368 292,265 492,270 1,085,627 $2,211,530
---------- ---------- ---------- ---------- ----------
Depreciation and amortization $ 15,231 26,427 18,076 54,836 $ 114,570
---------- ---------- ---------- ---------- ----------
Infrequent items $ 1,662 192 22,567 822 $ 25,243
---------- ---------- ---------- ---------- ----------
Operating income $ 36,200 53,261 26,657 171,604 $ 287,722
---------- ---------- ---------- ---------- ----------
Equity in earnings of affiliates $ 5,807 - - - $ 5,807
---------- ---------- ---------- ---------- ----------
Total assets $ 313,170 489,595 642,563 1,457,387 $2,902,715
---------- ---------- ---------- ---------- ----------
Capital expenditures $ 17,894 8,763 5,627 84,313 $ 116,597
---------- ---------- ---------- ---------- ----------
Capital expenditures for the corporate entities were $1,437,000, $3,200,000
and $1,694,000 in 1999, 1998 and 1997, respectively.
F-32
83
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Reconciliation of segment assets to total assets:
Year ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands)
Segment assets $3,387,509 $3,145,083 $2,902,715
Corporate assets 115,515 106,641 121,206
---------- ---------- ----------
Total assets $3,503,024 $3,251,724 $3,023,921
========== ========== ==========
(15) FINANCIAL INSTRUMENTS
The Company has entered into various types of financial instruments in
the normal course of business. In addition, on September 30, 1998, the
Company entered into forward purchase contracts to purchase shares of
its Class A Common Stock (see note 11).
For certain of these instruments, fair value estimates are made at a
specific point in time, based on assumptions concerning the amount and
timing of estimated future cash flows and assumed discount rates
reflecting varying degrees of perceived risk and the country of origin.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, may not represent
actual values of the financial instruments that could be realized in
the future.
At December 31, 1999 and 1998, the comparison of the carrying value and
the estimated fair value of the Company's financial instruments was as
follows:
1999 1998
------------------------ ------------------------
Carrying Fair Carrying Fair
value value value value
---------- ---------- ---------- ----------
(in thousands)
Long-term debt $1,646,718 $1,430,554 $1,488,641 $1,403,588
Interest rate swaps - 1,586 - 2,784
Forward purchase contracts - 17,251 - 3,216
========== ========== ========== ==========
The fair value of the interest rate swaps and forward purchase
contracts is the estimated amount that the Company would pay to
terminate the agreements. It is not practical to determine the fair
value of redeemable preferred stock held by related parties. The
carrying value of all other financial instruments at December 31, 1999
and 1998 approximate their estimated fair values.
F-33
84
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(16) COMMITMENTS AND CONTINGENCIES
(a) The Telegraph has guaranteed the printing joint venture partners'
share of leasing obligations to third parties, which amounted to
$9,254,000 ((pound)5,730,000) at December 31, 1999. These
obligations are also guaranteed jointly and severally by each
joint venture partner.
(b) In connection with the Company's insurance program, letters of
credit are required to support certain projected workers'
compensation obligations. At December 31, 1999, letters of credit
in the amount of $5,218,000 were outstanding.
(17) RELATED-PARTY TRANSACTIONS
(a) Amounts due from affiliates represent cash advances, net of
management and administrative expenses billed by Hollinger Inc.
and corporate affiliates of Hollinger Inc. Hollinger Inc. and its
affiliates billed the Company for allocable expenses amounting to
$38,239,000, $31,954,000 and $26,506,000 for 1999, 1998 and 1997,
respectively.
(b) On September 30, 1998, Hollinger Inc. sold 10,117,705 shares of
Class A Common Stock to various banks. As part of the
transaction, a subsidiary of Hollinger Inc. sold 408,551 shares
of Series D Preferred Stock to such banks and the banks then
tendered such shares to the Company for conversion into 2,795,165
shares of Class A Common Stock. In an independent transaction,
the Company entered into forward purchase contracts with such
banks to purchase 10,117,705 shares of Class A Common Stock for a
price of $13.88 per share. The terms of this transaction were
reviewed and approved by a special committee comprised of
independent outside directors of the Company's Board of
Directors. Credit Suisse First Boston acted as financial advisor
for the special committee.
F-34
85
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(18) INCOME TAXES
U.S. and foreign components of earnings before income taxes, minority
interest and extraordinary items are presented below:
1999 1998 1997
------------ ------------ ------------
(in thousands)
U.S. $ 263,600 192,191 12,148
Foreign 149,226 314,449 232,001
------------ ------------ ------------
$ 412,826 506,640 244,149
============ ============ ============
Income tax expense for the periods shown below consists of:
Current Deferred Total
------------ ------------ ------------
(in thousands)
Year ended December 31, 1999:
U.S. Federal $ 82,184 9,056 91,240
Foreign 53,067 (4,264) 48,803
State and local 13,866 1,294 15,160
------------ ------------ ------------
$ 149,117 6,086 155,203
============ ============ ============
Year ended December 31, 1998:
U.S. Federal $ 58,635 13,528 72,163
Foreign 76,492 60,069 136,561
State and local 12,442 1,933 14,375
------------ ------------ ------------
$ 147,569 75,530 223,099
============ ============ ============
Year ended December 31, 1997:
U.S. Federal $ 3,019 6,713 9,732
Foreign 27,856 54,344 82,200
State and local 764 959 1,723
------------ ------------ ------------
$ 31,639 62,016 93,655
============ ============ ============
F-35
86
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 35% for 1999, 1998 and 1997 as a
result of the following:
1999 1998 1997
------------ ------------ ------------
(in thousands)
Computed "expected" tax expense $ 144,489 177,324 85,452
Increase (reduction) in income taxes resulting from:
Nondeductible expenses for income tax purposes 12,904 9,676 11,083
Tax gain in excess of book gain - 22,869 -
U.S. state and local income taxes, net of federal benefit 9,669 10,041 1,409
Impact of taxation at different foreign rates 4,429 3,626 (2,639)
Dilution gain related to Hollinger L.P. (29,327) - -
Minority interest earnings in Hollinger L.P. (2,728) - -
Other 15,767 (437) (1,650)
------------ ------------ ------------
$ 155,203 223,099 93,655
============ ============ ============
F-36
87
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
1999 1998
------------ ------------
(in thousands)
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts $ 1,337 1,934
Accrued expenses 10,909 10,541
Net operating loss carryforwards 33,071 13,476
------------ ------------
Gross deferred tax assets 45,317 25,951
Less valuation allowance - (1,107)
------------ ------------
Net deferred tax assets 45,317 24,844
------------ ------------
Deferred tax liabilities:
Property, plant and equipment, principally due to
differences in depreciation 57,253 47,664
Intangible assets, principally due to differences in
basis and amortization 64,334 84,714
Foreign exchange basis differences 8,664 8,998
Long-term advances under printing contract 16,615 15,487
Deferred gain on exchange of assets 24,187 21,128
Unremitted earnings of a foreign equity investment 47,878 41,708
Other 40,139 12,812
------------ ------------
Gross deferred tax liabilities 259,070 232,511
------------ ------------
Net deferred taxes $ 213,753 207,667
============ ============
At December 31, 1999, the Company had approximately $86,900,000 of Canadian net
operating loss carryforwards. The Canadian net operating loss carryforwards will
expire in varying amounts through December 31, 2006.
Total income taxes paid in 1999, 1998 and 1997 amounted to $158,618,000,
$160,182,000 and $31,181,000, respectively.
F-37
88
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(19) EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
The Company sponsors six domestic defined contribution plans, three of
which have provisions for Company contributions. For the years ending
December 31, 1999, 1998 and 1997, the Company the contributed
$1,722,000, $501,000 and $471,000, respectively. The Company sponsors
twelve defined contribution plans in Canada and contributed $2,524,000
and $2,362,000 to the plans in 1999 and 1998, respectively.
The Telegraph sponsors a defined contribution plan, The Telegraph
Staff Pension Plan, for the majority of its employees, as well as a
defined contribution plan to provide pension benefits for senior
executives. In 1999, contributions to the defined contribution plan
are included as part of the service cost of the defined benefit plan.
Contributions to each of the plans were as follows:
1999 1998 1997
-------- -------- --------
(in thousands)
The Telegraph Staff Pension Plan $ - 6,120 5,780
The Telegraph Executive Pension Scheme $ 514 550 724
-------- -------- --------
The Telegraph plans' assets consist principally of U.K. and overseas
equities, unit trusts and bonds.
F-38
89
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
DEFINED BENEFIT PLANS
The Company and subsidiaries have seven domestic and seven foreign
single-employer defined benefit plans and contribute to various
union-sponsored, collectively bargained domestic multi-employer
pension plans. The Company's contributions to these plans for the
years ended December 31, 1999, 1998 and 1997 were:
1999 1998 1997
---------- ---------- ----------
(in thousands)
Single-employer plans $ 14,954 9,263 5,146
Multi-employer plans $ 6,888 4,959 2,185
---------- ---------- ----------
The Telegraph has a defined benefit plan that was closed on July 1,
1991 and provides only benefits accrued up to that date. The
liabilities of the plan have been actuarially valued as at December
31, 1999. At that date the market value of the plan assets was
$143,735,000, representing 97% of the estimated cost of purchasing the
plan's benefits from an insurance company. The actuary assumed a
discount rate of 6%. Increases to pension payments are discretionary
and are awarded by the trustees, with the Telegraph's consent, from
surpluses arising in the fund from time to time. Contributions to the
trust were $6,469,000 and $1,896,000 for 1999 and 1997, respectively.
There were no contributions made in 1998.
Pursuant to the West Ferry joint venture agreement, the Telegraph has
a commitment to fund 50% of the obligation under West Ferry's defined
benefit plan.
SINGLE-EMPLOYER PENSION PLANS
The benefits under the subsidiary companies' single-employer pension
plans are based primarily on years of service and compensation levels.
The Company funds the annual provision deductible for income tax
purposes. The plans' assets consist principally of marketable equity
securities and corporate and government debt securities.
F-39
90
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The components of net period benefit cost for the years ended December
31, 1999, 1998 and 1997 are as follows:
1999 1998 1997
---------- ---------- ----------
(in thousands)
Service cost $ 15,552 9,064 8,444
Interest cost 35,938 30,372 34,554
Expected return on plan assets (49,659) (43,615) (45,481)
Amortization of prior service costs 564 859 631
---------- ---------- ----------
Net periodic (benefit) cost $ 2,395 (3,320) (1,852)
========== ========== ==========
The table below sets forth the reconciliation of the benefit
obligation as of December 31, 1999 and 1998:
1999 1998
---------- ----------
(in thousands)
Benefit obligation at the beginning of the year $ 490,946 483,972
Adjustment to opening balance 116,339 -
Service cost 15,552 9,064
Interest cost 35,938 30,372
Participant contributions 7,809 3,227
Exchange rate differences 17,994 (24,310)
Curtailment (gain) loss (2,465) -
Changes in assumptions (50,151) 10,394
Actuarial (gain) loss (2,855) 8,508
Benefits paid (37,927) (30,281)
---------- ----------
Benefit obligation at the end of the year $ 591,180 490,946
========== ==========
F-40
91
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The table below sets forth the change in plan assets for the years
ended December 31, 1999 and 1998:
1999 1998
--------- ---------
(in thousands)
Fair value of plan assets at the beginning of the year $ 504,721 527,047
Adjustment to opening balance 103,326 -
Actual return on plan assets 77,707 21,908
Change in assumption (10,044) -
Exchange rate differences 23,543 (26,443)
Employer contributions 14,969 9,263
Participant contributions 8,122 3,227
Benefits paid (37,927) (30,281)
--------- ---------
Fair value of plan assets at the end of the year $ 684,417 504,721
========= =========
Year ended December 31, 1999 1998
---------- ----------
(in thousands)
Funded status $ 93,237 13,775
Unrecognized net actuarial loss (28,366) 46,003
Unrecognized prior service cost 2,776 578
---------- ----------
Prepaid (accrued) benefit cost $ 67,647 60,356
========== ==========
The ranges of assumptions were as follows:
1999 1998 1997
------------- ------------ ------------
Discount rate 6.0% - 8.0% 7.0% - 7.5% 7.0% - 7.5%
Expected return on plan assets 7.0% - 10.0% 7.0% - 9.0% 7.0% - 9.0%
Compensation increase 3.0% - 4.0% 3.0% - 4.0% 3.0% - 4.0%
============= ============ ============
F-41
92
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
MULTI-EMPLOYER PENSION PLANS
Certain U.S. employees are covered by union-sponsored multi-employer
pension plans, all of which are defined benefit plans. Contributions
are determined in accordance with the provisions of negotiated labor
contracts and are generally based on the number of man hours worked.
Pension expense for these plans was $2,402,000, $2,325,000 and
$2,185,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. The passage of the Multi-employer Pension Plan
Amendments Act of 1980 (the Act) may, under certain circumstances,
cause the Company to become subject to liabilities in excess of the
amounts provided for in the collective bargaining agreements.
Generally, liabilities are contingent upon withdrawal or partial
withdrawal from the plans. The Company has not undertaken to withdraw
or partially withdraw from any of the plans as of December 31, 1999.
Under the Act, withdrawal liabilities would be based upon the
Company's proportional share of each plan's unfunded vested benefits.
As of the date of the latest actuarial valuations, the Company's share
of the unfunded vested liabilities of each plan was zero.
POST RETIREMENT BENEFITS
The Company sponsors two foreign defined post retirement plans that
provides post retirement benefits to certain employees. The benefits
are accrued in accordance with Statement of Financial Accounting
Standards No. 112 "Employers Accounting for Postemployment Benefits."
The components of net period post retirement benefit cost for the
years ended December 31, 1999 and December 31, 1998 are as follows:
1999 1998
---------- ----------
(in thousands)
Service cost $ 895 794
Interest cost 2,600 2,372
Settlement/curtailment (1,549) -
---------- ----------
Net periodic post retirement benefit cost $ 1,946 3,166
========== ==========
F-42
93
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The table below sets forth the reconciliation of the accumulated post
retirement benefit obligation as of December 31, 1999 and 1998:
1999 1998
---------- ----------
(in thousands)
Accumulated post retirement benefit obligation
at the beginning of the year $ 37,987 43,361
Adjustment to opening balance 3,339 -
Service cost 895 794
Interest cost 2,600 2,372
Actuarial gains and losses (4,338) (4,296)
Benefits paid (1,425) (1,223)
Other 291 (3,021)
---------- ----------
Accumulated post retirement benefit obligation
at the end of the year $ 39,349 37,987
========== ==========
The table below sets forth the plan's funded status reconciled to the
amounts recognized in the Company's financial statements:
1999 1998
---------- ----------
(in thousands)
Unfunded status $ (39,349) (37,987)
Unrecognized net gain (loss) (6,611) (1,530)
---------- ----------
Accrued post retirement benefit cost $ (45,960) (39,517)
========== ==========
The weighted average discount rate used in determining the accumulated
post retirement benefit obligation was 7.25% and 6.25% for 1999 and
1998, respectively. All benefits under the plan are paid for by the
Company's contribution to the Plan. For measuring the expected post
retirement benefit obligation, a 9% annual rate of increase in the per
capita claims was assumed for 1998 and a 8% annual rate of increase in
the per capita claims was assumed for 1999. This rate was assumed to
decrease 1% per year to 5% in 2002 and remain at that level
thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. If the health care cost trend
rate were increased 1%, the accumulated post retirement benefit
obligation as of December 31, 1999 would have increased $2,316,000 and
the effect of this change on the aggregate of service and interest
cost for 1999 would have been an increase of
F-43
94
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
$221,000. If the health care cost trend rate were decreased 1%, the
accumulated post retirement benefit obligation as of December 31, 1999
would have decreased by $2,084,000 and the effect of this change on
the aggregate of service and interest cost for 1999 would have been a
decrease of $184,000.
(20) SUMMARIZED FINANCIAL INFORMATION
Summarized balance sheet and income statement data for Hollinger
International Publishing Inc. is as follows:
1999 1998 1997
---------- ---------- ----------
(in thousands)
Balance Sheet Data:
Current assets $ 417,439 73,596 500,914
Total assets 3,500,523 2,823,034 3,019,473
Current liabilities 720,935 503,027 797,392
Total liabilities 2,607,680 2,186,654 2,405,899
Minority interest 155,901 107,002 203,034
Stockholder's equity 736,942 529,378 410,540
Income Statement Data:
Operating revenues 2,147,402 2,197,760 2,211,530
Operating income 215,549 285,268 297,904
Net earnings 213,675 244,057 107,982
---------- ---------- ----------
F-44
95
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(21) QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 1999 and
1998 are as follows:
1999
-----------------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
---------- ---------- ---------- ----------
(in thousands, except per share data)
Total operating revenues $ 524,702 546,390 499,215 577,095
Total operating income $ 58,275 67,073 17,972 69,482
Net earnings $ 147,167 91,047 86 7,052
Basic earnings (loss) per share $ 1.35 0.91 (0.02) 0.05
Diluted earnings (loss) per share $ 1.20 0.81 (0.02) 0.04
---------- ---------- ---------- ----------
1998
-----------------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
---------- ---------- ---------- ---------
(in thousands, except per share data)
Total operating revenues $ 537,969 569,171 512,303 578,317
Total operating income $ 61,844 94,914 49,998 75,323
Net earnings $ 128,003 31,181 17,529 20,199
Basic (loss) earnings per share $ 1.39 0.28 (0.06) 0.16
Diluted (loss) earnings per share $ 1.05 0.25 (0.06) 0.16
---------- ---------- ---------- ----------
F-45
96
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(22) SUBSEQUENT EVENTS (UNAUDITED)
At December 31, 1999, the Company owned 51,700,000 shares in
Interactive Investor International (III) at a cost of approximately
$15,000,000 and representing an approximate 47.0% equity interest. On
February 17, 2000, III had its initial public offering (IPO) issuing
52,000,000 shares at (pound)1.50 ($2.42). The Company sold 5,000,000
shares of its holding into the IPO. After the IPO, the Company now
owns 46,700,000 shares representing 28.5% of the equity of III. Shares
in III have traded substantially above their issue price indicating a
significant gain to the Company. However, the Company is precluded
from selling its holding for a period of six months from the date of
the IPO.
F-46